This is the accessible text file for GAO report number GAO-09-372
entitled 'Insurance Reciprocity And Uniformity: NAIC and State
Regulators Have Made Progress in Producer Licensing, Product Approval,
and Market Conduct Regulation, but Challenges Remain' which was
released on May 7, 2009.
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
April 2009:
Insurance Reciprocity And Uniformity:
NAIC and State Regulators Have Made Progress in Producer Licensing,
Product Approval, and Market Conduct Regulation, but Challenges Remain:
GAO-09-372:
GAO Highlights:
Highlights of GAO-09-372, a report to congressional requesters.
Why GAO Did This Study:
Because the insurance market is a vital part of the U.S. economy,
Congress and others are concerned about limitations to reciprocity and
uniformity, regulatory inefficiency, higher insurance costs, and uneven
consumer protection. GAO was asked to review the areas of (1) producer
licensing, (2) product approval, and (3) market conduct regulation in
terms of progress by NAIC and state regulators to increase reciprocity
and uniformity, the factors affecting this progress, and the potential
impacts if greater progress is not made. GAO analyzed federal laws and
regulatory documents, assessed NAIC efforts, and interviewed industry
officials.
What GAO Found:
Reciprocity of producer licensing among states has improved, but
consumer protection and other issues present challenges to uniformity
and full reciprocity. Congress’ passage of the Gramm-Leach-Bliley Act
(GLBA) in 1999, NAIC’s Producer Licensing Model Act (PLMA) of 2000, and
uniform licensing standards (2002) have helped improve reciprocity and
uniformity. However, NAIC officials noted that as of March 2009, only
17 states were performing full criminal history checks using
fingerprinting, and some states that do such checks have been unwilling
to reciprocate with states that do not. In addition, some insurance
regulators in our sample noted that regulators do not have a systematic
way to access disciplinary records of other financial regulators.
Without full checks on applicants, states may less effectively protect
consumers. Licensing standards, including how state regulators define
lines of insurance, also vary across states, further hindering efforts
to create reciprocity in agent licensing. These differences may result
in inefficiencies that raise costs for insurers and consumers.
State regulators’ processes to approve insurance products have become
more efficient, but barriers exist to greater reciprocity and
uniformity. NAIC and state regulators have improved product approval
filings by creating the System for Electronic Rate and Form Filing
(SERFF) in 1998, which, according to some industry participants, has
simplified filings and reduced filing errors. However, SERFF does not
address differences in regulators’ review and approval processes. In
addition, an Interstate Compact was created in 2006 to facilitate
approval of certain life, annuity, disability income, and long-term
care products, which are accepted across participating states. As of
March 2009, 34 states participated in the Compact. However, the Compact
leaves some decisions on approval up to the individual states, and
several key states have not joined because they feel their processes
and protections are superior to the Compact’s. Moreover, differences in
state laws are likely to limit reciprocity in the approval of
property/casualty insurance products. To the extent these areas lack
reciprocity and uniformity, some industry participants noted that there
may be inefficiencies that slow the introduction of new products and
raise costs for insurers and consumers.
NAIC and the states have taken steps to improve reciprocity and
uniformity of market conduct regulation, but variation across states
has limited progress. For example, NAIC noted that in 2006 it developed
uniform guidance, and in 2008 created core competency standards, which
are intended to be part of an accreditation process for market conduct
regulation. NAIC noted that the accreditation plan has not been
finalized, and the standards do not include adherence to all NAIC
market conduct guidance. In addition, NAIC in 2002 developed the Market
Conduct Annual Statement (MCAS) to promote uniform data collection and
better target exams. However, industry participants have several
concerns about the MCAS and NAIC noted that fewer than half of
insurance regulators use it for data collection. NAIC has also created
a working group to coordinate enforcement actions. While better
communication and coordination appears to have resulted, according to
some states in our sample, the effect on uniformity of market conduct
regulation is uncertain. Lack of uniformity and reciprocity may lead to
inefficiencies, higher insurance costs, and uneven consumer protection
across states.
What GAO Recommends:
GAO recommends that, as Congress considers changes to its oversight of
the insurance industry, it explore ways to ensure all states and
jurisdictions can conduct nationwide criminal background checks as part
of their producer licensing and consumer protection functions. GAO also
recommends that NAIC and state insurance regulators work with the
insurance industry to identify product approval differences among state
regulators and improve how consistently state regulators review and
approve product filings once received through SERFF.
NAIC generally agreed with GAO’s recommendation, and provided
additional comments on a number of issues associated with insurance
regulation in general.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-372]. For more
information, contact Orice M. Williams at (202) 512-8678 or
williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Producer Licensing Reciprocity Has Improved, but Full Reciprocity and
Uniformity Challenges Remain:
Product Approval Has Become More Efficient, but Barriers Exist to
Greater Reciprocity and Uniformity:
NAIC Has Taken Steps Designed to Improve Market Conduct Regulation, but
Differences among States Have Limited Progress toward Reciprocity and
Uniformity:
Conclusions:
Matter for Congressional Consideration:
Recommendation to NAIC and State Insurance Regulators:
NAIC Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the National Association of Insurance
Commissioners:
Appendix III: Examples of Market Conduct Annual Statement Data
Elements:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Table:
Table 1: Examples of Criminal Convictions Identified through
Fingerprint-based Background Checks, but Not Self-reported by Insurance
License Applicants:
Figures:
Figure 1: Map of States and Jurisdictions NAIC Has Certified as
Reciprocal for Producer Licensing, as of March 2009:
Figure 2: Map of States Performing Criminal Background Checks Using
Fingerprinting, as of March 2009:
Figure 3: States That Have Joined the Interstate Compact for Product
Approval, as of March 2009:
Abbreviations:
AIG: American International Group, Inc.
GLBA: Gramm-Leach-Bliley Act:
IIPRC: Interstate Insurance Product Regulation Commission:
MARS: Market Analysis Review System:
MAWG: Market Analysis Working Group:
MCAS: Market Conduct Annual Statement:
MITS: Market Initiative Tracking System:
NAIC: National Association of Insurance Commissioners:
NARAB: National Association of Registered Agents and Brokers:
NCOIL: National Conference of Insurance Legislators:
PLMA: Producer Licensing Model Act:
RIRS: Regulatory Information Retrieval System:
RMBS: Residential mortgage-backed securities:
SAD: Special Activities Database:
SERFF: System for Electronic Rate and Form Filing:
URLS: Uniform Resident Licensing Standards:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 6, 2009:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Paul E. Kanjorski:
Chairman:
The Honorable Scott Garrett:
Ranking Member:
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises:
Committee on Financial Services:
House of Representatives:
A smoothly functioning insurance market that helps businesses and
consumers manage their risks is a vital part of the U.S. economy.
According to the National Association of Insurance Commissioners
(NAIC), at the end of 2008, insurance industry premium volume totaled
approximately $1.6 trillion in the 50 states and in the territories.
[Footnote 1] Though state insurance regulation involves a number of
critical functions, including oversight of insurers' financial
solvency, some Members of Congress and industry participants are
concerned about limitations to reciprocity and uniformity, higher
insurance costs, regulatory inefficiency, and uneven consumer
protection. Reciprocity is the extent to which state regulators accept
other states' regulatory actions, such as granting insurance licenses
or approving products for sale in the insurance market, and do not
require insurers to meet additional requirements in order to conduct
insurance business in their state. Uniformity is the extent to which
states have implemented either the same, or substantially similar,
regulatory standards and procedures. Though state insurance regulation
involves a number of critical functions, including oversight of
insurers' financial solvency, many of the questions about the extent of
reciprocity and uniformity of regulation across states have involved
the areas of licensing insurance agents (producer licensing), approving
insurance products, and regulating insurers' conduct in the insurance
market (market conduct).
Questions concerning reciprocity and uniformity of state-based
insurance regulation have persisted for a number of years. In 1999,
Congress passed the Gramm-Leach-Bliley Act (GLBA), which encouraged
states to enact uniform laws and regulations for licensing insurers or
reciprocity among states when licensing insurers that operate across
state lines.[Footnote 2] In response to the act, NAIC developed a model
law to streamline and standardize producer licensing requirements and
help states become more reciprocal. In addition, over the past 10 years
we have made a number of recommendations in reports, listed in related
GAO products, designed to help state regulators implement a consistent
set of insurance regulations. Congress has also periodically considered
the extent of insurance regulatory progress and the role the federal
government should play, if any, in regulating insurance. For example,
the National Insurance Act of 2007 would have established a national
office of insurance, provided for optional federal insurance charters,
and proposed creation of a comprehensive system of federal oversight.
[Footnote 3] In 2008, Congress considered establishing the National
Association of Registered Agents and Brokers (NARAB) to ease multi-
state licensing processes by setting uniform licensing standards across
states.[Footnote 4] However, neither of these proposals became law.
Additional questions about oversight of the insurance industry arose in
2008 when one of our nation's largest insurers, American International
Group, Inc. (AIG), experienced financial difficulties. Securities
lending activities undertaken by AIG's domestic life insurance
subsidiaries placed pressure on the AIG parent company's liquidity, and
in November 2008, the Federal Reserve Bank of New York authorized $22.5
billion for a credit facility to purchase residential mortgage-backed
securities from AIG that were part of the securities lending program.
[Footnote 5]
In considering options to best ensure efficient and effective state-
based regulation of insurance, Congress has had a number of questions
about the success of recent efforts and the challenges that remain. To
help policymakers better address these questions, as requested this
report examines three key areas of the insurance industry: (1) producer
licensing, (2) product approval, and (3) market conduct regulation.
[Footnote 6] In each area we assess the progress NAIC and state
regulators have made to increase reciprocity and uniformity, the
factors that have challenged efforts to achieve greater reciprocity and
uniformity, and the potential impact on the insurance industry and
consumers if greater progress is not made.
To assess insurance regulatory progress, challenges, and impacts, we
compared insurance regulatory goals set forth in federal legislation,
NAIC model acts and regulatory planning documents, and GAO reports.
Specifically, we reviewed the insurance provisions of GLBA and NAIC's
Producer Licensing Model Act (PLMA). We assessed regulatory documents
such as NAIC's 2003 Insurance Regulatory Modernization Action Plan
(Modernization Plan) and producer licensing, product approval, and
market conduct regulation guidelines. We also interviewed insurance
officials from a sample of nine state insurance departments, four
insurance companies, five insurance associations, and three consumer
advocacy organizations regarding reciprocity and uniformity progress
and challenges. We selected these states based on diversity of premium
volume size and geography. To assess regulatory progress and
challenges, we relied on descriptions and other documentation provided
by NAIC, states, insurers and associations, and consumer advocates.
We conducted this performance audit between February 2008 and April
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Results in Brief:
Reciprocity of producer licensing among states has improved, but
limited fingerprint-based background checks and differences in state
licensing requirements and insurance line definitions present
challenges to both full reciprocity and uniformity. Increased
reciprocity and uniformity have been goals of Congress, NAIC, state
insurance regulators, and insurers for a number of years. In 1999,
Congress passed GLBA, which encouraged at least 29 states to meet
reciprocity or uniformity conditions within 3 years of the act's
passage in order to avoid preemption of certain state producer
licensing laws and the potential formation of a federal regulatory body
for insurers. To help meet the requirements of the act, NAIC developed
the PLMA to promote a framework for reciprocal producer licensing
relationships among states. In addition, NAIC created a uniform
application for licensing so that insurance producers could use a
single licensing application form rather than separate applications for
each state or jurisdiction. While producer licensing has improved, full
reciprocity and uniformity challenges remain. While criminal background
checks are not required for reciprocal licensing arrangements between
states, state insurance regulators have responsibility to review
insurance applications and prevent criminals from being licensed.
However, according to NAIC, only 17 state regulators as of March 2009
were performing full criminal history checks using fingerprinting on
applicants and were doing so as part of their producer licensing
programs. Uniformity is limited when states have inconsistent
background check requirements, and some states that do such checks have
been unwilling to reciprocate with states that do not. These regulators
believe that they would be weakening the protections that background
checks provide by accepting the licensing decisions of states that do
not perform checks. Further, some insurance regulators in our sample
noted that regulators have no systematic way to query the regulatory
and disciplinary records of applicants that are maintained in separate
information systems used by banking and securities regulators. Without
thorough criminal and regulatory checks across states, regulators have
been reluctant to reciprocate with other states on producer licensing.
We also found that licensing standards, including definitions and
numbers of lines of insurance, varied across states and also hindered
reciprocity and uniformity.[Footnote 7] These differences among states
may result in inefficiency in licensing processes and higher costs for
insurers and consumers.
The process for approving insurance products has become more efficient,
but as with licensing, barriers exist to greater reciprocity and
uniformity. NAIC's Modernization Plan, formulated in 2003, calls for
greater uniformity and improving the timeliness and consistency of
reviews given to insurers' filings for product approval. NAIC and state
regulators have standardized the initial filing process by creating an
automated system in 1998 called the System for Electronic Rate and Form
Filing (SERFF), which is used for insurance product filing submission.
While SERFF provided a uniform way for insurers to submit product
filings, states' different processes for reviewing and following up on
filings may involve different procedures and approaches, and some
states may require varying levels of additional documentation on
products that may work against uniformity. In addition, according to
NAIC, many state regulators participate in an Interstate Insurance
Compact (the Compact), created in 2006, that established a multistate
public entity, the Interstate Insurance Product Regulation Commission
(IIPRC). The commission approves certain life, annuity, disability
income, and long-term care insurance products that are then accepted
for sale in the participating states. According to NAIC, as of March
2009, 34 states were participating in the Compact. However, while the
Compact has improved product approval uniformity and reciprocity among
participating states and jurisdictions, according to some industry
participants, it leaves some product approval decisions up to the
individual states. For example, the Compact allows participating states
to determine whether to allow fraud exceptions to life insurance policy
incontestability clauses, which are designed to protect insurers from
inaccurate policyholder information and consumers from coverage
denials. According to some industry participants, uniformity will be
difficult to achieve if states have the ability to make individualized
decisions that do not apply across multiple states. In addition,
several key states, including California and Florida, have not joined
the Compact because, according to industry officials, their product
approval standards are more stringent than those of the Compact.
Finally, according to some industry participants, full reciprocity in
the approval of property/casualty insurance products is unlikely to
occur because of differences in these products across states and
because of differences in state laws. For example, NAIC noted that laws
regarding responsibility for payment of, and limits to, damages differ
across states, and property/casualty policies must conform to these
laws. Ultimately, to the extent that reciprocity and uniformity are
lacking in these areas, the result may be inefficiencies that inhibit
the introduction of new insurance products and raise costs for insurers
and consumers.
NAIC and the states have taken steps to improve market conduct
regulation, but variations across states have limited progress toward
reciprocity and uniformity.
* To create common market analysis standards and promote more uniform
market conduct programs across states, NAIC and state regulators
established a Modernization Plan in 2003 to give insurance regulators a
guide and series of goals for improving reciprocity and uniformity of
insurance oversight across states.
* To provide state regulators with uniform guidance and standards, NAIC
created a set of 99 core competency standards in 2008 intended to be
part of a proposed market conduct accreditation program. NAIC also
produced the Market Regulation Handbook (Handbook) in 2006, which
brought together market analysis and examination guidance. In addition,
NAIC developed a uniform market conduct examination outline in 2002 to
improve uniformity of examination processes.[Footnote 8] However, NAIC
officials also noted that, as of March 2009, the accreditation plan had
not yet been finalized and that the core competency standards did not
include specific guidance for conducting market conduct examinations.
Implementation of the Handbook has varied across states as some
regulators reported using it only to the extent that it was consistent
with state laws, regulations, and regulatory priorities.
* To standardize market conduct data collection and analysis, NAIC and
state regulators created the Market Conduct Annual Statement (MCAS).
According to NAIC, as of March 2009, 29 states were committed to
collecting MCAS data, but these and other states and industry groups
had not reached a consensus on what data should be collected, whether
the information should be available to the public, and who should store
and manage it.
* In addition, NAIC created a working group to coordinate market
conduct enforcement actions, target issues, and increase collaboration
across states. According to some states in our sample, although the
market conduct working group appears to have resulted in better
information sharing and coordination of multistate collaborative
initiatives, the group's impact on uniformity is not yet clear.
In addition, according to NAIC, while NAIC and the National Conference
of Insurance Legislators (NCOIL) developed a model law in 2004 designed
to promote uniformity of state market conduct activities, as of March
2009, only one state had passed the model law. According to NAIC
officials, only one state passed the model law because it would have
restricted their ability to regulate their respective insurance markets
as they saw fit. Differences across states in their market conduct
regulation limit the uniformity and reciprocity of their efforts, which
in turn, can lead to inefficiencies for regulators and insurers and
uneven consumer protection across states.
This report contains one matter for congressional consideration and one
recommendation designed to strengthen states' oversight of insurance.
To improve state insurance regulators' ability to protect consumers by
identifying insurance license applicants with criminal backgrounds, as
part of its insurance oversight practices, Congress should explore ways
to ensure that all states and jurisdictions can conduct nationwide
criminal background checks as part of their producer licensing and
consumer protection functions. In addition, we recommend that NAIC and
state regulators work with the insurance industry to further identify
differences in the ways state regulators review and approve filings
received through SERFF, and take any necessary steps, where
appropriate, to improve consistency in their product approval
processes.
We provided a draft of this report to NAIC. The Chief Operating Officer
and Chief Legal Officer of NAIC provided written comments which are
reprinted in appendix II. NAIC generally agreed with the recommendation
in the report and stated that their efforts to improve the reciprocity
and uniformity of state insurance regulation will continue. NAIC also
noted that while the areas on which the report focuses--producer
licensing, product approval, and market conduct regulation--are
important, other regulatory areas, such as financial solvency
regulation, are also critical. NAIC also noted that in certain areas,
reciprocity and uniformity may not be appropriate. NAIC's comments, as
well as our responses, are summarized at the end of this report.
Background:
Insurers, state insurance regulators, and NAIC all have roles that are
important to the continued functioning of the insurance sector and to
U.S. consumers and businesses.
* Insurers provide services that allow individuals and businesses to
manage risk by providing compensation for certain losses or expenses,
such as car crashes, fires, medical services, or inability to work.
Some insurers also provide access to certain financial services, such
as annuities and mutual funds.
* State insurance regulators are responsible for enforcing state
insurance laws and regulations, including through the licensing of
agents, the approval of insurance products and their rates, and the
examination of insurers' financial solvency and market conduct. State
regulators typically conduct financial solvency examinations every 3 to
5 years, while market conduct examinations are generally done in
response to specific consumer complaints or regulatory concerns. State
regulators also monitor the resolution of consumer complaints against
insurers.
* NAIC is a voluntary association of the heads of insurance departments
from the 50 states, the District of Columbia, and five U.S.
territories.[Footnote 9] While NAIC does not regulate insurers, it does
provide services designed to make certain interactions between insurers
and regulators more efficient. These services include providing
detailed insurance data to help regulators understand insurance sales
and practices; maintaining a range of databases useful to regulators;
and coordinating regulatory efforts by providing guidance, model laws
and regulations, and information-sharing tools.
States Oversee the Insurance Industry through Producer Licensing,
Product Approval, and Market Conduct Regulation Functions, among
Others:
Insurance companies are regulated by the states, unlike the banking and
securities industries, which are regulated under a dual federal-state
oversight system.[Footnote 10] In addition to critical functions such
as oversight of insurers' financial solvency, state insurance
regulation involves key regulatory processes, including: licensing
insurance producers, including insurance agents, brokers, and
companies; reviewing and approving insurance products and rates; and
reviewing and examining insurers' market conduct.
* Licensing producers consists of reviewing license applications to
sell insurance products, reviewing applicants' criminal and regulatory
background, if any, and approving or denying applications and issuing
licenses.
* During product approval processes, regulators review insurers'
products and rates, in some cases, before they enter the market for
sale to consumers. Regulators review policy forms, which are legal
contracts that describe the characteristics of the products insurers
intend to sell and the rates or prices they intend to charge, and then
grant or deny product approval. Not all products are subject to prior
approval.
* Regulators' market conduct oversight involves protecting consumers by
monitoring and examining the conduct of insurance producers. To fulfill
this role, state regulators analyze information that they periodically
collect on the marketing and sales behavior of insurers in order to
identify any problems. Regulators also conduct periodic market conduct
examinations to investigate insurers' market behaviors in greater
depth. Regulators may issue findings and work with insurers on
corrective actions identified as a result of market analysis and market
conduct examinations.
NAIC Assists State Regulators with a Variety of Oversight Functions:
NAIC assists state regulators in their efforts to oversee the insurance
industry and serves regulators with a variety of functions. While NAIC
does not have regulatory authority over state insurance departments, it
collects, stores, and analyzes detailed insurance data to help
regulators understand insurance sales and practices. NAIC data and
databases provide information that regulators can use during their
producer licensing, product approval, and market conduct processes.
NAIC also helps states coordinate regulatory efforts by providing
guidance, model and recommended laws and regulations, and information-
sharing tools. State legislatures may implement NAIC's model laws by
passing model laws or substantively similar legislation in the states.
NAIC generally operates through a system of working groups, task
forces, and committees made up of state regulators and NAIC officials
that identify issues, facilitate interstate communication, and propose
regulatory improvements. These entities meet periodically to discuss
issues, build consensus on reforms, and vote to adopt new standards,
model laws, and model regulations. These processes are cooperative but
often take months or years to complete because of the number of
participants and diversity of priorities involved. In addition to these
functions, NAIC also developed and implemented a financial
accreditation program in 1990 to periodically review state insurance
departments for baseline financial solvency oversight standards.
Accreditation standards require state insurance departments to have
adequate statutory and administrative authority to regulate insurers'
corporate and financial affairs. NAIC is considering, but has not yet
developed, an accreditation program for regulation of insurers' market
conduct.
In 2003, NAIC created its Modernization Plan to highlight areas in
which NAIC and state regulators planned improvements for oversight of
the insurance industry. The plan reinforced the primary goals of
protecting consumers and creating a competitive and responsive
insurance market. For producer licensing, the plan sought to implement
a uniform electronic licensing system for individuals and business
entities that sell insurance. The Modernization Plan specifically
called for implementation of a single, uniform license application and
full implementation of an electronic fingerprint system as part of the
licensing process. For product approval, NAIC and state regulators
planned to fully implement and use SERFF for product filings. They also
planned to develop an interstate compact to provide a central point of
filing for certain life and annuity products that would be accepted
across states and would feature uniform national product standards. For
market conduct regulation, the plan noted the need for a common set of
standards for uniform market regulatory oversight that includes all
states. In particular, it called for each state to adopt uniform market
analysis standards and procedures, improve interstate collaboration,
and integrate market analysis with other key regulatory functions.
GAO Has Issued a Number of Reports on Insurance Regulation:
Since 2000, we have issued a number of reports on state regulators'
oversight of the insurance industry, including reports on improving
regulatory efficiency, uniformity, and reciprocity in the areas of
producer licensing, product approval, and market conduct regulation. We
have made numerous recommendations to the NAIC and states concerning
the lack of full criminal background checks by insurance regulators
during licensing processes, the need for more uniform product approvals
across states, and the difficulties insurance regulators face for
sharing information, including with regulators from other parts of the
financial services sector. NAIC generally concurred with these
recommendations, and stated that they would take steps to address them.
These reports have also recognized the importance of establishing
uniform minimum market conduct standards that are consistently used
across states. Appendix III provides a list of relevant insurance
reports that we issued between 2000 and 2008.
In a recent report looking at the broader financial regulatory system,
we developed a framework for assessing the strengths and weaknesses of
proposals for regulatory modernization that included a number of goals
relevant to a discussion of reciprocity and uniformity of insurance
regulation.[Footnote 11] Specifically, any financial regulatory system
should for example:
* be flexible and able to readily adapt to innovations and changes;
* be efficient and effective, eliminating overlap and minimizing
regulatory burden while effectively achieving regulatory goals;
* provide consumers with consistent protections for similar financial
products and services, including sales practice standards; and:
* provide consistent financial oversight, with similar institutions,
products, risks, and services subject to consistent regulation, which
would harmonize oversight within the United States and internationally.
In addition, we reported that given the difficulties to harmonize
insurance regulation across states through the NAIC-based structure,
Congress could consider the advantages and disadvantages of providing a
federal charter option for insurance and creating a federal insurance
regulatory entity.
Producer Licensing Reciprocity Has Improved, but Full Reciprocity and
Uniformity Challenges Remain:
NAIC and state regulators have taken steps to increase reciprocity in
producer licensing across states, but challenges remain. Increased
reciprocity and uniformity have been goals for Congress, NAIC, state
insurance regulators, and insurers for a number of years, especially
since passage of GLBA in 1999. Following passage of the act, NAIC and
state regulators worked to develop the PLMA and various NAIC and state
licensing standards. According to NAIC, since GLBA, most states have
passed and implemented the PLMA, which set licensing standards for
states to follow in order to meet reciprocity and uniformity
requirements. However, the small number of states performing full
producer background checks with fingerprinting remains a barrier to
greater reciprocity and uniformity. States that perform the checks may
be unwilling to reciprocate with those that do not for fear of
compromising their consumer protection laws. In addition, different
licensing requirements and insurance line definitions across states
have also limited reciprocity and uniformity.[Footnote 12] A lack of
reciprocity and uniformity in producer licensing could lead to
regulatory inefficiencies, higher insurance costs, and uneven consumer
protections.
Increased Reciprocity and Uniformity Have Been Goals for at Least the
Past Decade:
GLBA's passage in 1999 and the subsequent development of the PLMA by
NAIC and state regulators provided the framework and impetus for
reciprocity and uniformity in producer licensing processes among
states. If within three years of GLBA's enactment, at least 29 states
did not either pass uniform or reciprocal laws and regulations
governing the licensure of individuals and entities authorized to sell
insurance, GLBA called for the preemption of certain state producer
licensing laws and the potential formation of a federal regulatory body
for insurers. Following passage of the act, NAIC and states elected to
pursue the reciprocity option, with uniformity as a longer-term goal
for producer licensing.
To help states meet GLBA's reciprocity requirements, NAIC developed
PLMA to help address differences among states in the areas of defining
insurance products and lines, agent licensing standards, and variations
in state licensing applications. The act was intended to streamline and
standardize producer licensing requirements across states and improve
the efficiency of insurance licensing processes. To respond to state
differences in defining types or lines of insurance and general
inefficiency in licensing processes, PLMA sought reciprocity and
uniformity by specifying standard definitions for six major types or
lines of insurance for use across states. The act also provided for
reciprocal recognition across states of continuing education
requirements for producers, another area in which state requirements
had previously varied.
In addition, in 2002 NAIC developed the Uniform Resident Licensing
Standards (URLS) to help states implement the reciprocity requirements
of GLBA and PLMA. The URLS address some items that, according to NAIC
officials, were not included in PLMA, such as definitions for limited
lines of insurance. Further, the URLS provide the professional
standards for industry entry, continuation of licensure for insurers
and administrative standards for regulators to achieve uniformity and
increased efficiencies. These professional standards are segmented into
broad categories:
* licensing qualifications standards,
* pre-licensing education requirements,
* integrity and personal background checks,
* application for licensure,
* the appointment process,
* continuing education requirements,
* limited lines, and:
* surplus lines.
The background checks, in particular, call for states to fingerprint
their new producers and conduct state and federal background checks on
applicants. NAIC also developed the Uniform Application for Individual
Insurance Producer License, which created a standardized application
form that state regulators could use for insurance licenses. Use of the
form helps ensure that regulators would have a single producer license
application for use across states rather than multiple forms and
documentation for individual states. In reports in 2002 and 2004 on
insurance regulation, we noted that despite efforts made by NAIC and
state regulators to implement GLBA and PLMA and create more uniform
standards and processes, remaining differences among the states may
limit full reciprocity and uniformity.[Footnote 13] For example, we
previously found that some states are not willing to lower producer
licensing standards--such as eliminating criminal background checks
using fingerprint identification--to allow for uniform licensing
reciprocity, and few states have the ability to access nationwide
criminal history data necessary for full background checks on
applicants. In addition, we found that state insurance regulators could
improve consumer protection by sharing regulatory and complaint
information between financial services regulators.
In 2003, NAIC developed its Modernization Plan to provide a roadmap for
progress and centralize producer licensing and other regulatory goals,
thus promoting uniformity and reciprocity among the states. The plan
essentially incorporated the goals of the PLMA, the URLS, and the
Uniform Application. The plan also specifically sought to promote
producer licensing uniformity and reciprocity by calling for background
checks on insurance license applicants using electronic fingerprinting.
Not only would such checks provide uniform background reviews across
states, but they were intended to help state regulators ensure
consistently high levels of consumer protection. To achieve greater use
of criminal background checks with fingerprinting, the Modernization
Plan also called for efforts by NAIC and state insurance regulators to
recognize the important role of federal and state legislatures to pass
legislation that would provide state insurance regulators the
appropriate statutory authority necessary for conducting such checks.
[Footnote 14]
NAIC and States Have Made Progress on Regulatory Modernization Goals
for Producer Licensing:
As of March 2009, NAIC has certified 47 states and jurisdictions as
reciprocal based on their adoption and implementation of PLMA, which is
integral to achieving the reciprocity and uniformity envisioned by the
Modernization Plan. Passage of PLMA and certification by NAIC suggest
that these 47 states and jurisdictions have similar producer licensing
processes and standards in place and are reciprocal in their treatment
of insurers who wish to sell insurance products across those states.
Figure 1 provides a map of states and jurisdictions NAIC has certified
as reciprocal.
Figure 1: Map of States and Jurisdictions NAIC Has Certified as
Reciprocal for Producer Licensing, as of March 2009:
[Refer to PDF for image: map of the United States]
On the map, all states and the District of Columbia are certified as
being reciprocal, with the following exceptions:
California;
Florida;
New York;
Washington.
Source: NAIX; Art Explosion (map).
[End of figure]
To be considered reciprocal for producer licensing in states beyond the
home state where an initial license was granted, states must meet four
conditions. First, states must permit producers with a license in their
home state to sell insurance without satisfying any other additional
requirements other than submitting:
* a request for licensure,
* the application used for licensure in the home state,
* proof of licensure and good standing in the home state, and:
* any requisite fee.
Second, states must accept the home state's continuing education
requirements. Third, states must not impose any other requirements for
licensure that would limit insurance activities because of place of
residence. And fourth, each state that meets these criteria must grant
licensing reciprocity to insurers of all other states that also meet
the criteria. NAIC certifies states as reciprocal based on the criteria
above. Once certified as reciprocal, states have the continuing
obligation to remain compliant, and NAIC has a continuing obligation to
certify states' compliance.
According to NAIC officials, as of December 2008, all states were using
the Uniform Application for non-resident applicants. Use of this form,
according to NAIC and industry participants, has helped make licensing
more uniform across states. Insurance industry officials said that the
form has been of particular benefit to insurers with agents operating
in multiple states, as they no longer are required to fill out
different forms for each state.
Progress toward Reciprocity and Uniformity Has Been Limited and Some
Barriers Exist to Further Progress:
While passage of PLMA and certification of 47 states and jurisdictions
as reciprocal represent progress in the area of producer licensing,
several key states such as New York, California, and Florida have not
been certified by NAIC as reciprocal because they generally have not
accepted the producer licensing standards of other states--a condition
of certification. An NAIC official noted that reasons for a lack of
full reciprocity and uniformity among states include conflict among
existing state laws and legislative and industry opposition to full
fingerprint-based criminal background checks. In addition, the
certification process does not include a review of whether states are
also complying with the URLS, which added some standards that were not
included in PLMA but which NAIC believed were important for meaningful
uniformity and reciprocity. According to NAIC officials, they plan to
incorporate these additional standards in future certification efforts.
Other limits on or barriers to complete reciprocity and uniformity
include the limited number of states performing fingerprint background
checks and differences in state licensing requirements and insurance
line definitions.
The Small Number of States Performing Full Background Checks on
Producers Is a Barrier to Reciprocity and Uniformity:
While criminal background checks are not required for reciprocal
licensing arrangements between states, state insurance regulators have
a responsibility to review insurance applications and prevent criminals
from being licensed.[Footnote 15] Though some state insurance
regulators have sought authority to conduct full background checks
using fingerprinting, NAIC officials noted that only 17 states as of
March 2009 were performing full nationwide criminal history checks
using fingerprinting as part of their licensing programs. With only 17
states performing such checks, reciprocity and uniformity of producer
licensing across states may be limited when states that perform
fingerprint checks do not accept licenses granted by states that do not
perform such checks. Figure 2 is a map of states that conduct these
background checks.
Figure 2: Map of States Performing Criminal Background Checks Using
Fingerprinting, as of March 2009:
[Refer to PDF for image: map of the United States]
The map indicates that the following states are performing criminal
background checks using fingerprinting:
Alabama:
Arkansas:
Colorado:
Delaware:
District of Columbia:
Georgia:
Hawaii:
Illinois:
Indiana:
Iowa:
Kansas:
Kentucky:
Louisiana:
Maine:
Maryland:
Massachusetts:
Michigan:
Minnesota:
Mississippi:
Missouri:
Nebraska:
New Hampshire:
New Mexico:
New York:
North Carolina:
North Dakota:
Oklahoma:
Oregon:
Rhode Island:
South Carolina:
South Dakota:
Vermont:
Virginia:
Wisconsin:
Wyoming:
States not performing criminal background checks using fingerprinting
are as follows:
Alaska:
Arizona:
California:
Connecticut:
Florida:
Idaho:
Montana:
Nevada:
New Jersey:
Ohio:
Oregon:
Pennsylvania:
Tennessee:
Texas:
Utah:
Washington:
West Virginia:
Source: NAIC; Art Explosion (map).
[End of figure]
States unable to perform these checks generally cite lack of statutory
authority as a primary reason. Specifically, state insurance regulators
and other industry participants noted that regulators have had
difficulty getting state legislatures to grant the authority for
insurance departments to access the law enforcement databases needed to
review applicants for nationwide criminal records. Some states and
industry officials reported industry group opposition as a primary
reason for lack of movement by legislatures to grant full background
check authority and noted that further progress by the states without
Congress granting such authority was unlikely. NAIC also noted that
Federal Bureau of Investigation administrative standards related to
fingerprinting have also been a barrier. Other states noted the
importance of criminal background checks and mentioned that other
entities like the Securities and Exchange Commission have the authority
under federal law to conduct full background checks with fingerprinting
as part of their process to license those who wish to sell securities
products.
Officials from some of the states in our sample also noted that many
states are unwilling to reciprocate with other states that do not
conduct such checks and expressed concern that doing so would diminish
their consumer protections. Without the ability to conduct full
criminal background checks, state regulators are less likely to detect
applicants with criminal background and deter them from obtaining
licenses. State regulators' inability to thoroughly review applicants'
regulatory background also hinders efforts to efficiently license
applicants across multiple states.
Some insurance regulators from our sample noted that they have the
ability to access NAIC databases such as the Regulatory Information
Retrieval System (RIRS) and the Special Activities Database (SAD) to
check applicants' background, but they reported being unable to
systematically perform regulatory history checks by querying the
disciplinary records of separate systems used by banking and securities
regulators. Regulatory history checks by insurance regulators consist
of efforts to determine whether insurance applicants have a history of
consumer complaints or regulatory enforcement actions. Accessing this
history may be difficult because banking, securities, and insurance
regulators maintain regulatory background information in separate
information technology systems. Some insurance regulators noted that no
systematic query function or mechanism exists that would enable
insurance and other regulators to check enforcement and complaint
information in these separate systems in order to review information
from across the three financial services sectors. Without the ability
to share regulatory history data, insurance regulators may be less able
to detect applicants with prior regulatory issues or histories of
consumer complaints and prevent their entry into the insurance industry
from other states or other parts of the financial services sector.
Table 1 provides examples from the state of California on criminal
convictions that were identified through fingerprint-based criminal
background checks but that applicants for insurance licenses did not
disclose on their insurance license applications.
Table 1: Examples of Criminal Convictions Identified through
Fingerprint-based Background Checks, but Not Self-reported by Insurance
License Applicants:
Year of insurance application: 2008;
Criminal conviction identified: Possession of controlled substance,
misdemeanor;
Year of conviction: 2006.
Year of insurance application: 2008;
Criminal conviction identified: Battery against former spouse/fiancé;
Year of conviction: 2008.
Year of insurance application: 2008;
Criminal conviction identified: Year of insurance application: DUI with
blood alcohol content over 0.08 percent, and driving with suspended
license;
Year of conviction: 2004.
Year of insurance application: 2008;
Criminal conviction identified: Battery, misdemeanor;
Year of conviction: 2002.
Year of insurance application: 2007;
Criminal conviction identified: Possession of a switch-blade,
misdemeanor;
Year of conviction: 2003.
Year of insurance application: 2007;
Criminal conviction identified: Delaying, resisting, obstructing
officer, felony;
Year of conviction: 2006.
Year of insurance application: 2007;
Criminal conviction identified: Failure to provide conviction
adjudication percentage, felony;
Year of conviction: 1999.
Year of insurance application: 2007;
Criminal conviction identified: Possession of firearm by specified
person, felony;
Year of conviction: 1998.
Year of insurance application: 2007;
Criminal conviction identified: Fight in a public place, misdemeanor;
Year of conviction: 1994.
Year of insurance application: 2007;
Criminal conviction identified: Grand theft, felony;
Year of conviction: 1987.
Year of insurance application: 2007;
Criminal conviction identified: Conspiracy, felony;
Year of conviction: 1998.
Year of insurance application: 2007;
Criminal conviction identified: Filing false or fraud claim payment,
felony;
Year of conviction: 1998.
Year of insurance application: 2007;
Criminal conviction identified: Theft of property, misdemeanor;
Year of conviction: 2007.
Year of insurance application: 2007;
Criminal conviction identified: Trespass without consent;
Year of conviction: 2007.
Year of insurance application: 2007;
Criminal conviction identified: Giving false information to peace
officer;
Year of conviction: 2005.
Year of insurance application: 2007;
Criminal conviction identified: Driving without valid license;
Year of conviction: 2005.
Year of insurance application: 2007;
Criminal conviction identified: Corporal injury to spouse, misdemeanor;
Year of conviction: 1997.
Year of insurance application: 2006;
Criminal conviction identified: Forgery, felony;
Year of conviction: 2003.
Source: State of California, Department of Insurance.
[End of table]
Different Licensing Requirements and Insurance Line Definitions in Some
States also Affect Reciprocity and Uniformity:
Despite progress to move reciprocity and uniformity forward through
GLBA, PLMA, and the URLS, a lack of uniform producer licensing
standards across states has limited reciprocity and uniformity. Some
state industry groups suggested that even NAIC-certified reciprocal
states have additional or different requirements and processes for
applicants. In some states, definitions of insurance lines and the
number of insurance lines vary. For example, some states have followed
the PLMA to define major lines with variable life and variable annuity
as one line, requiring only one license to sell both types of products.
Other states treat them separately as individual lines, and may require
separate licenses for each. In addition, some states use limited lines
definitions beyond the five categories defined in the URLS, which could
require agents to obtain additional licenses. For example, some states
have a line for luggage protection, which is not one of the URLS
categories. The effect is that insurers experience the time, cost, and
inefficiency that result from following different application processes
and standards to meet individual state requirements.
Some states also have additional requirements that may limit
reciprocity and uniformity. For example, some states require business
entity applicants to register with secretary of state offices before
state insurance departments issue producer licenses, but others do not.
In addition, some states have different license renewal periods for
resident and non-resident insurers. Without more uniform licensing
standards, some insurers suggest they will continue to experience
greater time and administrative cost burdens that may get passed on to
consumers.
A Lack of Full Reciprocity and Uniformity in Producer Licensing Could
Lead to Uneven Consumer Protection and Some Inefficiency:
According to some industry participants in our sample, while
reciprocity and uniformity of producer licensing across states have
grown, the differences in background checks, licensing requirements,
and insurance line definitions across states prevent them from
achieving full reciprocity and uniformity, and may impact regulators
and consumers. For example, differences in state regulators' review of
applicants' backgrounds could lead to uneven consumer protection across
states, and the resulting lack of reciprocity among states could lead
to less regulatory efficiency, as some states do not recognize licenses
obtained in other states. Insurers and industry associations have
suggested that the different licensing requirements and insurance line
definitions in some states could also create inefficiencies as agents
operating in multiple states would have to meet different requirements
in each state. These inefficiencies could result in higher costs for
insurers, which in turn could be passed on to consumers.
Product Approval Has Become More Efficient, but Barriers Exist to
Greater Reciprocity and Uniformity:
According to NAIC officials, NAIC and state regulators have taken steps
to make product approval more efficient, but barriers to greater
reciprocity and uniformity exist in the areas of product review and
states' approval processes. NAIC, working with state regulators, has
set goals for increasing reciprocity and uniformity in product approval
that address inefficiencies in product filing and review and encourage
an open and competitive insurance market. NAIC and state regulators
have standardized the initial filing process by creating an automated
system that states and insurance producers may use for filing
submissions, which is the first part of product approval. However, some
states still have individual filing review and follow-up practices that
work against uniformity. To improve the speed and efficiency of product
approval, NAIC and some states have developed an Interstate Compact
with standardized procedures for approval, but only for certain lines
of insurance and only for participating states. Without greater
reciprocity and uniformity of insurance product approval, regulatory
inefficiencies may raise costs for insurance producers and result in
less product choice and higher costs for consumers.
NAIC Has Set Goals for Increasing Reciprocity and Uniformity for
Product Approval:
NAIC has made progress in its efforts to make product approval
processes more uniform and reciprocal by creating its 2003
Modernization Plan, which outlined written goals for improving the
speed and efficiency of product approval across states. The plan gives
insurance regulators a guide for improving reciprocity and uniformity
of insurance oversight across states. Specifically, the plan calls for
interstate collaboration and reforms to make filing more efficient so
that states can improve the timeliness and quality of their reviews of
insurance product filings. The plan also sought to integrate multi-
state regulatory procedures with individual state regulatory
requirements. For example, all states would use regulatory tools, such
as uniform filing transmittal documents and a review standards
checklist, which would allow insurance companies to verify state
requirements before making filings. The plan also called for creating
the Interstate Compact, which would develop uniform national product
standards and provide a central point of filing. The Compact would use
the standards to receive filings, review their contents, and grant
approvals that would be honored by all participating states.
NAIC Has Automated Some Product Approval Processes, but Many States
Still Have Individual Requirements:
NAIC, in conjunction with state regulators, developed SERFF to
simplify, automate, and standardize the way insurers develop and submit
insurance product rate and form filings. According to NAIC, SERFF
provides a fast, simplified, electronic process for filing and provides
filing checklists for those submitting filings and is used by 52 states
and jurisdictions. Florida does not use SERFF but does require
electronic filing for product approval submissions. According to NAIC
officials, the frequency of SERFF filing use has also grown, with
filings increasing from around 7,000 in 2001 to around 550,000 at the
end of 2008. Officials noted that as of March 2009, approximately 85
percent of all product filings to state insurance departments had
occurred through the system. Since SERFF implemented a standardized,
electronic process and checklists for required filing materials and
processes, NAIC and some state regulators and industry associations
reported that filing submission errors had decreased significantly and
approvals of filings that did not require revisions had increased
dramatically.
While SERFF has resulted in product filing improvements, several
limitations to greater reciprocity and uniformity remain. First, while
SERFF provided a uniform way for insurers to submit product filings,
states' processes for reviewing and following up on filings may involve
different procedures and approaches, and some states may require
varying levels of additional documentation on products. Second, state
regulators and their staffs may have varying levels of resources and
expertise and their own informal ways of conducting reviews that create
different approaches among states. Some states and one insurer in our
sample reported that these differences might work against product
approval reciprocity and uniformity. Specifically, the groups suggested
that these individual state approaches, or "desk drawer" practices, may
be inefficient because they represent fragmented ways of reviewing the
same or very similar products. Some industry participants reported that
the effect of desk drawer practices increases the time it takes
insurers to get their products approved for sale, raising costs for
consumers. However, such practices may also allow regulators to target
efforts to protect consumers based on state-specific concerns and
issues.
States Have Created a Compact for Certain Lines of Insurance, but
Limited Participation and Other Challenges Limit Its Effectiveness:
According to NAIC, many state insurance regulators now participate in
the Interstate Compact for multistate insurance product approval.
According to NAIC and the IIPRC, NAIC and state regulators created the
framework for the compact in 2000 and developed a working group for the
compact and an Interstate Insurance Compact Model Law in 2002. The
Compact was formally created when the first two states, Colorado and
Utah, enacted legislation required at the state level to allow each
state to join the Compact. NAIC noted that the IIPRC, an organization
that manages the operations of the Compact, was established in May
2006, and in December 2006 the IIPRC adopted its first uniform product
standards. It operates as a multistate public entity and serves as a
single point for filing, review, and approval of life insurance,
annuity, disability income, and long-term care insurance products. Once
approved by the commission, products may be sold in all member states.
The Compact was developed to make processes for filing, reviewing, and
approving certain insurance products more efficient and effective, and
it aimed to promote uniformity through national product standards and
processes. According to NAIC, as of March 2009, Compact membership
consisted of 34 states and insurance jurisdictions (fig. 3).[Footnote
16] The commission started receiving and reviewing product filings in
2007, and as of March 2009, NAIC reported that the number of filings
made through the compact is relatively small but growing, with a mix of
large and small states participating.
Figure 3: States That Have Joined the Interstate Compact for Product
Approval, as of March 2009:
[Refer to PDF for image: map of the United States]
States where compact has been enacted into law:
Alabama:
Alaska:
Arkansas:
Colorado:
Georgia:
Hawaii:
Idaho:
Indiana:
Iowa:
Kansas:
Kentucky:
Louisiana:
Maine:
Maryland:
Massachusetts:
Michigan:
Minnesota:
Mississippi:
Nebraska:
New Hampshire:
North Carolina:
Ohio:
Oklahoma:
Pennsylvania:
Rhode Island:
South Carolina:
Tennessee:
Texas:
Utah:
Vermont:
Virginia:
Washington:
West Virginia:
Wisconsin:
Wyoming:
States where compact has not been enacted into law:
Arizona:
California:
Connecticut:
Delaware:
District of Columbia:
Florida:
Illinois:
Missouri:
Montana:
Nevada:
New Jersey:
New Mexico:
New York:
North Dakota:
Oregon:
South Dakota:
Source: NAIC; Art Explosion (map).
[End of figure]
While the Compact has provided more centralized and streamlined
processes, several key states have not joined. In particular, key
regulatory states like New York, Florida, and California have not
joined. According to some industry participants, states that have not
joined the Compact generally feel there might be a loss of consumer
rights and remedies with Compact-approved products. In addition, some
industry participants noted that states that have not joined the
Compact may feel their current product approval and consumer protection
processes are superior to the Compact's processes. Some industry
participants, however, say that without fuller participation by states,
full reciprocity and uniformity, even for the limited number of
insurance lines covered by the Compact, will be difficult to achieve.
Some states in our sample have formed their own alternative for product
approval. Officials from the states of California and Texas noted that
several states and jurisdictions, including California, Florida, Texas,
and the District of Columbia, formed the Multi-State Review Program,
which expedites product approval for annuity products using standards
agreed upon by the program's participants. However, a system comprised
of compacting states, non-compacting states, and states forming their
own approval arrangements has raised some concerns that multiple
product approval systems may work against uniformity.
Other issues with the Compact may also limit reciprocity and
uniformity. According to some industry participants, some Compact
processes allow states to make their own decisions regarding the nature
of the products being approved. For example, under the Compact, states
can decide whether they will allow fraud exceptions to life insurance
policy incontestability clauses, or provisions in life insurance
policies that generally limit insurers to a period of 2 years to
determine whether policyholders misrepresented their health status and
information. These clauses generally protect insurers against
misinformation that might be provided by policyholders and consumers
against insurers that might deny policyholders coverage despite
collecting years of premium payments. According to some industry
participants, uniformity will be difficult to achieve if states have
the ability to make individualized decisions that do not apply across
multiple states.
Further, two consumer groups expressed concern that the commission
lacks transparency and accountability. First, these groups pointed out
that product filings to the commission are not public, in contrast with
some states that require publicly available insurance product filings.
With the commission, product information does not become public until
or unless products are approved. As a result, consumer groups suggested
that they and others do not have an opportunity to review filings and
help ensure that harmful products do not get approved for market.
However, one state and one insurer offered a number of reasons for not
having public filings, including (1) protection of insurers'
proprietary information, (2) potential misuse of competitors'
information in marketing or lawsuits, and (3) the possibility that
consumers will not understand the information or might be misled by it.
For example, one insurer noted that product filings can be complicated
and are written for regulatory review rather than to inform consumers.
However, consumer groups suggested that without greater review of
proposed products, it would be difficult for advocates to help protect
consumers and hard for the general public to be informed buyers of
insurance products. Second, consumer groups expressed concerns that the
lack of public filings would make it much harder for consumer groups
and the public to identify how suitable potential new products might be
for consumers before they are approved. These groups noted that the
commission's standards provide uniformity for filing submission,
review, and approval, but do not address issues of consumer
suitability. And third, consumer groups questioned what recourse the
commission offered consumers in the event that an insurance product
harmed the public. The groups noted that it was unclear whether
consumers could sue the commission the same way they might sue a state
if an insurance product harmed them.
Full Reciprocity Is Unlikely for Approvals in Property/Casualty
Insurance Lines:
According to some industry participants, while the Compact has
increased reciprocity of approvals for some life, annuity, and long-
term care insurance products, similar reciprocity is unlikely for
property/casualty insurance products. According to some regulatory
officials, the products covered by the Compact lend themselves to more
uniform approval standards and processes because they are "mobile
products," such as life insurance policies, that can move with
consumers and are less subject to local geographic characteristics such
as weather, earthquakes, or urban versus rural environments. In
addition, property/casualty products must conform to a number of
relevant state laws, which often differ across states. These include
laws regarding responsibility for, and limits to, damages, which differ
across states. For example, some states allow joint and several
liability in the recovery of damages, while others might not.[Footnote
17] Some states limit certain types of damages, such as pain and
suffering, while others do not. According to one state, to the extent
that property/casualty policies must be written to account for each
state's specific laws, reciprocity across states for approval of these
policies will be limited.
A Lack of Reciprocity and Uniformity Could Lead to Inefficiencies That
Impact Consumers:
According to some industry participants, lack of reciprocity and
uniformity in product approval processes could lead to inefficiencies
that may have negative impacts across the insurance industry. First,
when different states conduct product approval in multiple ways, such
as through a voluntary compact that some states do not join or by
striking individual agreements with other states, regulators may have
difficulty achieving an efficient nationwide system of insurance
oversight that produces uniform processes and consistently high
standards. Uneven levels of protection across states may also mean that
consumers may be better protected in some states than others. Second,
according to some industry participants, when states have different
approaches and practices for product approval, it may be difficult for
insurers to achieve product approval in timely, cost-effective ways
that enable them to bring new products to market that could serve
consumers. Some insurers said that different state processes mean that
insurers that file for approval in multiple states will have to produce
multiple applications or tailor them to meet state requirements. And
third, when regulators and insurers face such challenges, producing an
insurance regulatory structure that consistently protects consumers
across states becomes difficult to achieve.
Lack of reciprocity and uniformity and the inefficiencies that may
result from different product approval systems may impact both insurers
and consumers in additional ways. Some insurers in our sample
specifically suggested that these inefficiencies cost insurers and
regulators time and financial resources and may inhibit the
introduction of new products that could serve consumers as they seek
protection against various risks. In addition, some industry
participants noted that lack of uniformity and reciprocity in product
approval processes may lead to higher costs for insurers and, in turn,
consumers.
NAIC Has Taken Steps Designed to Improve Market Conduct Regulation, but
Differences among States Have Limited Progress toward Reciprocity and
Uniformity:
NAIC and the states have taken steps to improve market conduct
regulation, but variations in how states carry out market conduct
oversight and in state laws and resources have limited progress toward
reciprocity and uniformity. NAIC has established goals aimed at
producing common market analysis and examination standards that states
can use as the basis for a uniform market conduct program. In addition,
NAIC has created guidance to help state regulators better manage and
more uniformly approach market conduct oversight. While these efforts
have encouraged more standardized practices for market conduct analysis
and examination, states vary in how uniformly they use NAIC guidance
and tools and in the resources and staff they have available for market
conduct regulation. States' varied use of the NAIC's market conduct
guidance, varying individual state insurance laws, and different levels
of resources and staff expertise may also lead to market conduct
inefficiencies and uneven consumer protection across states.
NAIC Has Established Goals for Improving Market Conduct Regulation:
NAIC has moved market conduct regulation forward by establishing goals
and guidance in its 2003 Insurance Regulatory Modernization Action
Plan, which aimed to improve uniformity of market conduct oversight by
state regulators and covered other areas such as producer licensing and
product approval. For market conduct oversight, the plan's goals called
for formal and rigorous market analysis across states. NAIC promotes
analysis in order to help regulators identify market problems and
companies and better protect consumers. According to NAIC officials,
data collection and analysis were also intended to equip regulators
with information that could help them better target their efforts and
resources rather than relying on broader, more expensive exams to
identify and respond to issues. The plan also calls for each state to
adopt uniform market analysis standards and procedures and integrate
market analysis into their overall regulatory functions. NAIC goals
were developed, in part, in response to a 2003 GAO report, which
recommended that NAIC and the states identify a common set of standards
for a uniform market conduct program for use by all states, including
procedures for market analysis and coordinating market conduct exams.
[Footnote 18] We also recommended that NAIC and states establish a
mechanism to encourage state legislatures to adopt and implement the
minimum standards. While NAIC and state regulators have taken some
steps to improve market conduct regulation, variations among state
standards still exist.
NAIC Has Initiated a Number of Efforts to Improve Market Conduct
Regulation, but Implementation among States Has Varied:
NAIC has taken several steps to improve market conduct regulation that
include updating examination guidance and developing new data
collection and analysis tools to promote uniformity. In addition, NAIC
created a list of fundamental skills and resources state regulators
should have for oversight of the insurance industry. NAIC has also
sought to improve coordination of enforcement actions across states.
However, use and implementation of these tools and guidance have varied
across states.
NAIC Has Developed Market Conduct Guidance and an Accreditation
Program, but States' Use of the Guidance Varies, and the Program Has
Not Been Implemented:
According to NAIC officials, NAIC has initiated a number of efforts to
improve market conduct regulation with tools and guidance for more
standardized examination approaches. NAIC developed market conduct
examination standards and procedures in its Market Regulation Handbook
(Handbook), published in 2006. For example, NAIC officials told us that
the Handbook updated NAIC's market regulation guidance by combining
standards for market analysis and market conduct examinations into one
document. Revisions to the Handbook and the tools and guidance it
contains were designed to help states move from relying on broad
examinations for identifying market conduct issues to using market data
and analysis to identify problems and target regulatory responses.
In addition, NAIC officials told us that NAIC developed the Market
Conduct Uniform Examination Outline in 2002 to promote state uniformity
in examination scheduling, pre-examination planning, core examination
procedures, and examination reporting. The outline sought to help
minimize state variations in market conduct examinations. Among other
things, the Outline includes a list of reasons for examinations, such
as:
* complaints,
* extent of an insurer's market share,
* financial examination findings,
* findings from other state regulators,
* a shift in business practices,
* past history of noncompliance,
* information collected through regulatory surveys,
* length of time since the last examination, and:
* new laws enacted since the last examination.
According to NAIC officials, states can use the Outline at their
discretion and self-certify with NAIC that they are using it, though
NAIC does not verify states' reporting. Self-certification allows NAIC
to gauge the extent of compliance with the Outline.
To promote a set of strong, uniform standards for market oversight,
NAIC also developed guidance in the form of 99 core competency
standards, which it considers to be fundamental capabilities and
resources that state regulators should have in place for strong market
conduct oversight. The body of core competency standards consists of
four principle elements. First, departments of insurance should have
the authority to analyze, examine, or investigate any entity involved
with insurance transactions. Further, departments should have the staff
training, resources, and types of examiners needed for market conduct
oversight. Second, departments should have the ability to conduct
market conduct data collection and analysis and designate appropriate
staff leaders responsible for an effective market analysis program.
Third, departments ought to have a means of moving from market analysis
to regulatory action by developing a spectrum of regulatory tools that
are available for use in response to market conduct examinations,
investigations, and consumer complaints. The fourth principle element
of the core competency standards aims to promote interstate
collaboration in regulatory action through participation in NAIC
working groups and databases and information sharing among regulatory
staff designated as contacts on multistate enforcement actions.
According to NAIC officials, in addition to the Handbook and
Examination Outline, NAIC has been working since 2005 to develop an
accreditation program for market conduct regulation. NAIC developed the
financial accreditation program in 1990 to help ensure uniformity of
financial solvency regulation by the states. Its proposed market
regulation accreditation program seeks to promote a market conduct
accreditation process so that states can objectively monitor and
oversee the conduct of insurers and protect consumers. Specifically,
the program outlines six market conduct accreditation categories, based
on the 99 core competency standards:
* data collection and reporting, including use by states of key NAIC
databases such as the Regulatory Information Retrieval System,
Complaints Database, Market Analysis Review System, Market Conduct
Examination Tracking System, Special Activities Database, and Market
Initiatives Tracking System;
* market analysis, which includes having appropriate regulatory staff
with specific responsibility for data analysis and developing a
baseline understanding of insurance markets and issues;
* market conduct examinations, including having procedural guidelines
and standards in place to determine when examinations should be called,
and which adhere to the Scheduling, Coordinating, and Communicating
chapter of the Market Regulation Handbook;
* interstate collaboration, including contacts designated by
commissioners of insurance for the purpose of interstate communication
and collaborative actions;
* oversight of contractors hired by insurance departments that have the
expertise and professional qualifications to perform market conduct and
analysis and examinations; and:
* treatment of confidential information, meaning that insurance
departments should have the authority to analyze, examine, or
investigate entities involved with the business of insurance, as well
as protect consumers, enforce a continuum of regulatory responses when
needed, and keep records and insurance information confidential.
According to NAIC, while it encourages states to use its tools and
guidance when developing market conduct oversight programs, use of the
Market Regulation Handbook, including the Examination Outline is not
mandatory and states have discretion regarding the extent to which the
tools are implemented. Some of the state regulators in our sample noted
that they used the Handbook to the extent its provisions were
consistent with their state laws and market conduct priorities. For
example, officials from one state department of insurance told us that
they had instructed market conduct staff to use the Handbook as a
foundation to develop its current revisions to market conduct
procedures, but only if the Handbook's guidelines did not conflict with
the state's statutes or regulatory priorities. According to NAIC
officials, as of March 2009, 41 states and the District of Columbia had
self-certified compliance with the Examination Outline; NAIC does not
validate states' certification and has no immediate plans to do so.
While NAIC has fully developed core competency standards and drafted a
market regulation accreditation program, use of the standards has been
varied, and the accreditation program, as of March 2009, was still a
proposal that had not yet been implemented. For example, as of that
date, NAIC officials told us that 29 states and jurisdictions reported
through an NAIC survey that they met the general core competency
standards. In addition, according to NAIC, the accreditation program's
core competency standards require state insurance regulators to follow
the Scheduling, Coordinating, and Communicating chapter of the Market
Regulation Handbook with respect to planning market conduct
examinations, but not other key market conduct guidance found in the
Handbook. For example, the market conduct accreditation program's core
competency standards do not require adherence to guidance such as how
to conduct property/casualty, life and annuity, health, and multi-state
examinations. Without requirements to follow other key parts of the
Handbook as part of the market conduct accreditation program, it is
unclear to what extent the program will help ensure strong market
conduct practices and encourage uniform examination procedures across
states.
NAIC Has Developed Data Collection and Analysis Tools, but Faces
Challenges in Its Efforts to Collect Market Conduct Data from Insurers:
NAIC has created market conduct data collection and analysis tools, but
efforts to collect market conduct data from insurers face challenges.
To improve data collection, NAIC developed the Market Conduct Annual
Statement (MCAS), which began first as a pilot project in 2002 and
became permanent in 2004. MCAS is a data collection instrument designed
to help state insurance regulators better understand insurers' conduct
in the marketplace, identify problem areas, and use information to
target market conduct responses and examinations. The information
collected includes, for example, annual data on how long it takes
insurance companies to settle claims and the separate numbers of
complaints insurers received from state departments of insurance and
directly from consumers. Additional examples of MCAS data elements
collected on different lines of insurance can be found in appendix III.
[Footnote 19] According to NAIC, once the data are collected, state
regulators use it to establish baseline measures for targeting their
market conduct efforts and prioritizing companies for regulatory
attention. State regulators may use deviation from the measures as
criteria for following up with an insurer on their conduct or
undertaking an examination.
According to NAIC officials, as of March 2009, 29 states were
collecting data using MCAS. Other states used their own processes for
tracking market conduct and identifying issues that required regulatory
attention. For example, several state regulators reported using the
information collected through MCAS to perform baseline analysis on
insurance companies writing business in their states, identify insurer
conduct that might require their attention or an examination, or
monitor individual company and industry trends. One state regulator
noted that since it had begun participating in MCAS, its market conduct
staff no longer depended exclusively on premium volume or basic
complaint activity to monitor an insurance company's market conduct.
Further, according to the regulator, MCAS helps the department to
identify potential problems and their sources, thereby allowing
department staff to target their responses rather than perform a
comprehensive review.
According to NAIC, while MCAS provides NAIC and insurance regulators
with detailed market conduct data, greater uniformity and participation
have been limited by disagreement among insurers and consumer groups
over the types of data that MCAS collects and the extent to which the
data should be made public. According to several insurers and industry
officials, public access to MCAS is problematic because they (1)
consider MCAS data to be proprietary and fear their competitive
position might be compromised if other insurers had access to it, (2)
believe MCAS data could be misunderstood by the general public and used
to make poor insurance decisions, and (3) feel MCAS data could be
misused by trial attorneys to try to initiate class action suits
against insurance companies. However, some consumer groups mentioned
that MCAS data would better serve consumers if it contained more
detailed insurer information than the summary level data currently
collected. In their view, more detailed data would help consumers
better compare insurance companies and their products and would help
regulators better protect consumers by using data to identify and react
to market conduct issues. These disagreements about the data types,
uses, and access have slowed consensus and cooperation on the use of
uniform data to improve market conduct and have limited progress toward
strong, uniform oversight.
While the data access issues had not been resolved as of March 2009,
NAIC officials noted that they will begin aggregating market conduct
data in 2009 for eventual use by participating states during their
oversight activities. NAIC also plans to continually refine data
collection, aggregation, and analysis processes, and it plans to work
with states and the insurance industry on existing and future MCAS
concerns. In addition, some industry participants in our sample noted
that it was difficult to achieve greater market conduct uniformity when
not all states participate in standardized improvement efforts like the
MCAS. NAIC has suggested that without greater state participation in
this tool, some regulators will have to rely more on exams, which can
be costly and duplicative across states, than on market analysis to
monitor the marketplace and protect consumers.
In addition to MCAS, NAIC created Level 1 Analysis in 2005, which is an
automated set of questions regulators can use to help evaluate
individual companies. NAIC then built on Level 1 Analysis by developing
Level 2 Analysis that offers regulators additional sources of possible
information on insurers' market conduct. Further, NAIC developed the
Market Analysis Review System (MARS) in 2005, which stores Level 1
Analysis questions and insurers' answers. The MARS database can be
accessed by states and helps regulators identify and respond to market
conduct issues by seeing analysis performed by other states. NAIC sees
these developments as standardized, uniform tools that state regulators
can use to improve access to key regulatory information, identify
insurance issues, and respond with targeted actions.
NAIC Has Taken Steps to Improve Coordination of Enforcement Actions:
NAIC has also taken steps to improve coordination of enforcement
actions across states, but uniformity here is uncertain. NAIC formed
the Market Analysis Working Group (MAWG) in 2003 to help states
coordinate insurance regulatory actions. Specifically, the group
functions to facilitate interstate communication on identified or
potential market conduct issues, share information of common concern
regarding insurers' activity, and promote a targeted regulatory
response from a spectrum of possible actions. Some states in our sample
said that through MAWG, several multistate collaborative actions had
been initiated in both market conduct examinations and settlements. In
addition, one state insurance department noted that MAWG's quarterly
meetings and the open lines of communication among states enabled it
and other states to bring problem companies to the attention of the
group for possible coordinated regulatory action. According to NAIC
officials, because state regulators have a forum to discuss regulatory
issues and actions, MAWG has also facilitated a more consistent range
of regulatory responses to similar multistate concerns.
In addition to MAWG, NAIC developed the Market Initiative Tracking
System (MITS) in 2006, which enables states to track and share
regulatory actions by entering these actions into an electronic
database. For example, several states told us that they log their
market conduct activities into MITS so that other states can learn
about their issues and actions. Further, NAIC's Regulatory Information
Retrieval System (RIRS), a database that dates back to the 1980s but
was automated in 1995, specifically allows states to see the
adjudicated regulatory actions of other states. NAIC officials noted
that the RIRS system helps them monitor the insurance market, hone in
on issues they consider significant, and more efficiently respond to
those issues.
Variation in State Laws and Resources Have Limited Progress toward
Uniformity:
Individual laws passed by state legislatures and implemented by state
insurance departments govern market conduct regulation and consumer
protection activities. While such differences allow for the regulatory
flexibility needed in a diverse national marketplace for insurance,
different laws, regulations, and practices may make greater uniformity
among states difficult to achieve. To help increase the uniformity of
state laws regarding market conduct activities, in 2004 NAIC and NCOIL
worked to jointly develop a market conduct model law that created
market conduct standards to promote uniformity across states. However,
according to NAIC, differences among states played a significant role
in limiting support for the model law, and ultimately only one state
adopted it.
Market analysis and examination uniformity are also limited by
variations among states regarding their respective resources. According
to NAIC, states that have greater budgetary and staff resources may be
able to undertake more detailed data collection and analysis and
respond using NAIC's market conduct tools and guidance to a greater
degree than states that have fewer resources. In addition to budgetary
and resource differences, states may also vary in the levels of
expertise their staff possess for conducting the data collection and
analysis state regulators may use to identify and respond to market
conduct issues. States with fewer resources and less expertise may be
less able to analyze and use market conduct information as part of
their regulatory oversight. However, some states in our sample noted
that state regulators may contract with outside experts to fulfill
functions or areas of expertise they lack in-house, and although it may
be costly, insurers generally bear these expenses.
Limited Reciprocity and Uniformity Can Create Inefficiencies and Uneven
Consumer Protection across States:
Limited uniformity in the use of NAIC's market conduct tools and in
state laws and resources--and the resulting limits on reciprocity among
states--may create inefficiencies for insurers and regulators and lead
to uneven levels of consumer protection across states. For example, in
the absence of uniform examination procedures and criteria for
selecting insurance companies to examine, states implement their
respective market conduct processes based on state laws, insurance
department priorities, and established practices. Varying examination
processes across states may mean that insurers may be subjected to
multiple and sometimes simultaneous exams by regulators in the states
where they operate. An insurer's compliance with examinations by
different state regulators may lead to increased costs to the company,
which in turn may be passed on to the consumer in the form of higher
insurance rates. When state regulators do not rely on other states'
market conduct oversight, they may have to conduct more regulatory
activities on their own.
In addition, state regulators' varying use of the NAIC's market conduct
data collection instruments, examination tools, and guidance may lead
to varying regulatory efforts in overseeing insurance companies in
respective states. According to some insurers and consumer groups,
insurance companies located in states that have stronger market conduct
surveillance standards may be subjected to more scrutiny than those in
states with less stringent market conduct standards. Varying levels of
market conduct oversight may lead to uneven levels of consumer
protection so that consumers may have stronger protections in some
states than others.
Conclusions:
Reciprocity and uniformity in the insurance areas of producer
licensing, product approval, and market conduct regulation can result
in benefits to regulators, insurers, and consumers. For regulators,
reciprocity and uniformity can mean standardized processes and
standards that can lead to efficient and effective ways of working with
insurers to license agents and brokers, review and approve products for
sale in the marketplace, and protect consumers from harmful actors and
products. Reciprocity for insurers means faster, more efficient ways of
introducing and gaining approval for new insurance products and
assurance that regulatory processes will be similar across states,
potentially helping insurers keep their overall insurance product costs
lower. An insurance system with greater reciprocity and uniformity may
also limit inefficiencies that could contribute to higher product costs
for insurers and consumers and may provide for more coordinated, even
consumer protection across states. To the extent that reciprocity and
uniformity are limited across states, benefits to regulators, insurers,
and consumers may also be limited.
NAIC has made progress on reciprocity and uniformity in key areas of
producer licensing, product approval, and market conduct, but this
progress has not come quickly and in some cases has been limited.
* Efforts to achieve greater reciprocity in producer licensing began
following passage of GLBA in 1999, and as of March 2009, 47 states had
been certified as reciprocal. However, several key states, including
California, Florida, and New York, were still not considered reciprocal
for non-resident producer license applicants, and it appears that many
states still impose separate or additional requirements on resident
producers. In addition, as of March 2009, only 17 states were
conducting criminal background checks on applicants, resulting in
uneven consumer protections across states. Finally, we recommended in
2000 that NAIC and state insurance regulators develop mechanisms for
routinely obtaining regulatory data from financial services regulators.
Limited progress has been made in this area, and we continue to believe
that the development of such a system is an important element of
effective consumer protection efforts.
* NAIC furthered efforts to improve reciprocity and uniformity in the
approval of insurance products when it implemented SERFF in 1998, a
system that has automated the process of applying for the approval of
insurance products. As of March 2009, SERFF is used in 52 states and
jurisdictions, and approximately 85 percent of all filings are achieved
through the system. NAIC and the states also advanced product approval
reciprocity and uniformity with the creation of its Modernization Plan
in 2003. In addition, NAIC and the states created the Interstate
Insurance Product Regulation Commission, a single product approval
entity that approves products that are recognized among the compacting
states. Nonetheless, it appears that many states are still imposing
their own approval practices and requirements on insurers, which limit
both reciprocity and uniformity. In addition, the compact is limited to
34 states and jurisdictions and only certain types of insurance
products.
* NAIC and the states have also made efforts to improve market conduct
regulation, which were items noted in NAIC's 2003 Modernization Plan
and addressed in a 2003 GAO report. Our report recommended that NAIC
and states take steps to adopt and implement minimum standards for
market conduct oversight that would include all states.[Footnote 20] We
still believe improvements are needed to address remaining market
conduct regulatory differences among states. Such actions could include
ensuring that all appropriate guidance--for example, from the Market
Regulation Handbook--be included as part of the accreditation process,
and ensuring that states meet uniform minimum standards in a timely
manner. NAIC and state insurance regulators have completed some
improvements, such as revising market conduct guidance and creating a
market conduct working group that has helped increase uniformity across
states. However, other important efforts, such as the collection and
use of standardized market conduct data and implementation of the core
market conduct competency standards, were still incomplete as of March
2009. As a result, uniformity across states may be limited, and
consumer protections may vary.
Regulators have faced, and will continue to face, a number of
challenges to increasing reciprocity and uniformity in these areas. For
example, insurance regulatory improvement may require increasing
uniformity of state laws that govern licensing requirements and product
approval, which in turn requires cooperation from state legislatures.
NAIC and state insurance regulators' work with state legislatures has
occurred over a number of years, and some regulators told us that
cooperation had been difficult to achieve in some areas. In particular,
according to NAIC, despite efforts in many more states, regulators in
only 17 states have obtained statutory authority to conduct full
criminal background checks with fingerprinting. Another challenge is
the differing levels of resources and expertise among state insurance
departments, which means that some states may have the resources and
staff for certain efforts, while others may not. Further, NAIC's
operations generally require consensus among a large number of
regulators, and NAIC seeks to obtain and consider the input of industry
participants and consumer advocates. Obtaining a wide range of views
may create a more thoughtful, balanced regulatory approach, but working
through the different goals and priorities of all of these entities can
result in lengthy processes and long implementation periods for
regulatory improvements. Continued progress in a timely manner,
however, is critical to improving the efficiency and effectiveness of
the insurance regulatory system.
We also recognize that the costs and benefits of further increases in
reciprocity and uniformity must be considered. Regulators, insurers,
and consumers may not benefit if achieving uniformity occurred by
simply lowering standards across states. At the same time, it may not
be feasible to achieve reciprocity and uniformity across states by
meeting the highest standard achieved by any one state. In addition, it
is not clear that full reciprocity in some areas would be realistically
achievable. For example, as we have said, uniformity and reciprocity
for the approval of property/casualty products would require
significant changes in state laws, including a wide body of tort law.
States have tailored those laws to best protect their residents, and
since many are not exclusive to insurance, such large-scale changes may
be unlikely.
As the insurance regulatory system is part of the broader financial
regulatory system, it should support the goals that the federal
government has for the entire financial regulatory system and should be
part of discussions for potential regulatory reforms. In a recent
report, we suggested a number of goals for the U.S. financial
regulatory system. Reciprocity and uniformity within the regulation of
insurance could support at least four of these goals. First, a
regulatory system where changes can be made uniformly across states may
be able to more readily adapt to innovations and changes in the
insurance market. Second, greater reciprocity and uniformity could lead
to a more efficient system for regulators through the reduction of
overlapping activities, as well as for insurers by reducing the number
of different requirements they must meet across states. Third, greater
uniformity across states could provide more consistent protection for
consumers purchasing similar products and services. Fourth, greater
uniformity could also provide more consistent financial oversight for
similar institutions, products, and services. In that report we also
noted that, given the difficulties to harmonize insurance regulation
across states, Congress could explore the advantages and disadvantages
of providing a federal charter option for insurance and creating a
federal insurance regulatory entity. The establishment of a federal
insurance charter could help alleviate some of these challenges, but
such an approach could also have unintended consequences for state
regulatory bodies and for insurance firms as well. However, any
consideration of a change to the current insurance regulatory
structure, including a possible federal insurance charter, should
involve appropriate cost-benefit analysis.
Matter for Congressional Consideration:
In order to improve how state insurance regulators identify insurance
license applicants with criminal backgrounds and protect consumers,
Congress, as it explores the advantages and disadvantages of a change
to the federal role in the regulation of insurance, should explore ways
to ensure that all state insurance regulators can conduct nationwide
criminal background checks as part of their producer licensing and
consumer protection functions.
Recommendation to NAIC and State Insurance Regulators:
To continue progress achieved through NAIC's electronic and automated
product filing processes, we also recommend that NAIC and state
regulators work with the insurance industry to further identify
differences in the ways state regulators review and approve filings
received through SERFF, and take any necessary steps, where
appropriate, to improve consistency in their product approval
processes.
NAIC Comments and Our Evaluation:
We provided a draft of this report to NAIC. The Chief Operating Officer
and Chief Legal Officer of NAIC provided written comments which are
reprinted in appendix II. In commenting on a draft of this report,
NAIC's Chief Operating Officer and Chief Legal Officer agreed with our
recommendation. NAIC also made some general comments about the benefits
of state-based regulation.
In the area of producer licensing, NAIC noted that while we
acknowledged that 47 states had been certified as reciprocal, we also
described reciprocity as limited. As we discuss in the report, while
NAIC has made progress in some areas, we continue to view overall
progress on uniformity and reciprocity as limited. NAIC and the states
have made progress with reciprocity, but the certification process does
not include a review of whether states are also complying with the
URLS, which added some standards that were not included in PLMA but
which NAIC believed were important for meaningful uniformity and
reciprocity as noted in the report. For example, the certification
process does not require criminal background checks. Also related to
this issue, NAIC noted that one procedural issue has been a significant
impediment, FBI administrative standards related to fingerprinting. We
have added this new information to the report. NAIC also noted a number
of other efforts that they have taken in the area of producer licensing
including the State Producer Licensing Database.
In the product approval area, NAIC commented on a variety of issues and
provided some updated data on the Interstate Compact and activities of
IIPRC, both of which are discussed in the report. Moreover, they noted
that they have continued to make progress in adopting uniform standards
in certain property lines and that more companies are registering. The
letter also provides NAIC's views on the flexibility and improvements
afforded states regarding product approval, an issue raised during the
course of our work and discussed in the report. NAIC also discusses the
Compact approval process and transparency. As we noted in the report,
consumer groups we spoke with expressed concern that the product
approval process was not more transparent. NAIC commented about
suitability and consumer protection issues associated with the Compact
by noting that the state insurance regulators retain the authority to
protect consumers and preserves consumers' rights to pursue legal
remedies not specifically directed to the content of the product.
Finally, with respect to market conduct regulation, NAIC highlighted
its efforts in this area and noted that it continues to pursue
standardized data collection practices, the development of a Market
Regulation Accreditation Program, and participation by all states in
MCAS data collection by 2010.
In addition, NAIC provided technical comments on the report which we
incorporated, as appropriate.
As agreed with your offices, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days
from its date of issue. At that time we will send copies of this report
to interested congressional committees, the Chief Executive Officer of
the National Association of Insurance Commissioners, and others. In
addition, the report will be available at no charge on GAO's Web site
at [hyperlink, http://www.gao.gov].
If you or your staff have any questions regarding this report, please
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made major contributions
to this report are listed in appendix IV.
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
As Congress has considered options to help ensure efficient and
effective regulation of the insurance market, policymakers have had a
number of questions about the success of recent efforts and the
challenges that remain. To address these questions, in each of the
regulatory areas of producer licensing, product approval, and market
conduct regulation, we have been asked to assess (1) the progress NAIC
and state regulators have made to increase reciprocity and uniformity,
(2) the factors that have challenged efforts to achieve greater
reciprocity and uniformity, and (3) the potential effects on the
insurance industry and consumers if greater progress is not made.
To assess the progress, challenges, and potential effects on the
insurance industry and consumers related to reciprocity and uniformity
in producer licensing, product approval, and market conduct, we
interviewed officials from state insurance departments, the National
Association of Insurance Commissioners (NAIC), the National Conference
of Insurance Legislators (NCOIL), primary insurance companies,
insurance associations, and consumer advocacy groups. We met with
insurance regulators from nine states--Alabama, California, Florida,
Georgia, Illinois, New York, Texas, Pennsylvania, and Ohio. We selected
this sample of states due to the states' geographic diversity and
respective premium volumes, which ranged from small to large. The four
insurers we met with provided property and casualty insurance coverage
and life and health insurance to consumers. We also met with several
industry associations representing insurance companies covering
property and casualty and life and health insurance lines across
states. The consumer advocacy groups with whom we met represented both
individual state consumers and consumers nationwide. We also reviewed
congressional testimony from knowledgeable industry participants,
several of whom we interviewed for this study. Further, we examined
regulatory documents such as NAIC's Insurance Regulatory Modernization
Action Plan and NAIC's standards and guidelines concerning producer
licensing, product approval, and market conduct regulation. Finally, we
reviewed our previous reports and testimonies and Congressional
Research Service reviews.
To examine the progress, challenges, and potential effects on the
insurance industry and consumers related to producer licensing
reciprocity and uniformity, we spoke with NAIC officials, NCOIL
officials, state insurance regulators, insurance companies, insurance
associations, and consumer advocacy groups. To obtain information on
the producer licensing goals that NAIC established, we reviewed the
2003 NAIC Insurance Regulatory Modernization Action Plan and other NAIC
documents. We also reviewed our previous reports and testimonies that
called for improvements to producer licensing. To document the states
that NAIC has certified as reciprocal for producer licensing, and those
states that have statutory authority to perform criminal background
checks with fingerprinting, we relied on NAIC data.
To examine progress in making product approval more efficient, the
barriers to further reciprocity and uniformity and the potential
effects if more progress is not made, we spoke with NAIC, NCOIL,
states, industry representatives, and consumer advocacy groups. We
reviewed NAIC's Modernization Plan and other NAIC documentation to
determine NAIC's product approval goals. Previous GAO studies provided
recommendations geared toward improvement of product approval
regulation. To gather information on the states that have joined the
Interstate Compact, we relied on NAIC and Interstate Insurance Product
Regulation Commission (IIPRC) data.
To examine the steps NAIC has taken to improve market conduct
reciprocity and uniformity, and the potential impact on the insurance
industry if greater progress does not occur, we spoke with NAIC, state
insurance regulators, insurance companies, insurance industry
associations, and consumer advocates. Documentation from NAIC such as
the Modernization Plan and the Market Regulation Handbook provided us
with NAIC's market conduct goals and guidance to promote uniform market
conduct standards. To obtain information on the specific data elements
collected through the MCAS, we relied on NAIC documentation on elements
collected for individual and group life, fixed and variable annuities,
private passenger auto, and homeowners insurance products.
We conducted our work from February 2008 through April 2009 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the National Association of Insurance
Commissioners:
NAIC:
National Association of Insurance Commissioners:
Executive Office:
444 N. Capitol Street, NW:
Washington, DC 20001-1509:
p: 202-471-3990:
f: 816-460-7493:
Central Office:
2301 McGee Street, Suite 800:
Kansas City, MO 64108-2662:
p: 816-842-3600:
f: 816-783-8175:
Securities Valuation Office:
48 Wall Street, Sixth Floor:
New York, NY 10005-2906:
p: 212-398-9000:
f: 212-382-4207:
[hyperlink, http://www.naic.org]
March 31, 2009:
Ms. Orice M. Williams
Director, Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G. Street, NW:
Washington, DC 20548:
Dear Ms. Williams:
Thank you for the opportunity to submit comments on the GAO's Report,
Insurance Reciprocity and Uniformity. We appreciate the GAO's continued
interest in state-based insurance regulation and its recognition of the
progress the NAIC and its members, the nation's chief insurance
regulators, have made in modernization. We agree with the GAO's
recommendation for the NAIC and state regulators to continue working to
improve consistency where appropriate in the review and approval of
product filings. We also look forward to working with Congress as it
considers the GAO recommendation concerning nationwide criminal
background checks for insurance producers.
As a general comment, I note the three areas on which this report
focuses (Producer Licensing, Product Approval and Market Conduct
Regulation) are important focus points for state insurance regulators.
However, we would not want readers to view these areas as the primary
focus of state insurance regulation, to the exclusion of the financial
solvency arena. Also, the report places a great deal of emphasis on
uniformity in the identified areas. Although the NAIC and its members
have made great strides towards uniformity as the report describes, we
do not view uniformity as a goal in itself. In fact, and as discussed
further below, uniformity may not be the right result for insurance
consumers or the insurance industry.
Some regulatory practices may vary from state to state depending on
consumer protection interests. Furthermore, geographical differences
have a significant impact on property and/or casualty insurance and the
regulation thereof Civil justice systems, workers compensation systems,
and perils insured against can be state-specific. We note the need for
the regulatory system to account for these necessarily state-specific
factors exists whether the system is state or federally based.
State-specific factors cannot be ignored in the effort to modernize
insurance regulation. The notion anything less than complete uniformity
results in "inefficiency" presumes a theoretically flawless
alternative. In actuality, a system mandating the same standards for
hurricane zones as it does for regions with no such risk would do more
to hamper efficiency. Our current system clearly does not inhibit the
market, as new products such as pet insurance and identity theft
protection continue to emerge. Simply put, not every insurance product
lends itself to uniformity, and uniformity does not necessarily lead to
a more effective or efficient regulatory system.
Furthermore, states may have different methods of consumer protection,
but this does not make consumer protection "uneven" in the U.S.
Consumer protections are often state-based and differ from jurisdiction
to jurisdiction in such areas as tort law, contract law, and state
unfair trade practices acts.
State criminal laws similarly result in different consumer protections
among the states and unequal application based upon prosecutorial or
judicial discretion.
In reference to the GAO's general discussion:
* In the brief discussion of a federal insurance charter at the end of
the report, there is no recognition the federal government lacks the
requisite experience and financial resources necessary to support
federal regulation of insurance. The states and the NAIC have the
regulatory infrastructure in place to support state-based regulation. A
more thorough cost/benefit analysis is necessary to shed any light on
the practical consequences of a transition to a federal regulator.
* The report refers to AIG as "one of our nation's largest insurers"
and attributes some concern about oversight of the insurance industry
to AIG's financial difficulties. In fact, AIG is a global financial
services conglomerate that does business in 130 countries. MG owns 176
other companies, in addition to 71 U.S. state-regulated insurance
subsidiaries. AIG's insurance companies remain solvent, in part because
state regulation continues to wall them off from the high-risk credit
default swap activities engaged in by MG Financial Products. AIG's
Financial Products operation -- not its 71 U.S. insurance
subsidiaries -- created a systemic risk causing the federal government
to intercede.
In the area of Producer Licensing:
* The report discusses the process by which states become reciprocal
for producer licensing under the Gramm-Leach-Bliley Act. Although the
GAO acknowledges 47 states have been certified as reciprocal, and that
all states use the Uniform Application for Individual Insurance
Producer License, reciprocity is nevertheless characterized as
"limited". The NAIC's certification of such a vast majority of states
demonstrates our commitment to uniform standards and the states' hard
work in implementation.
* We agree most states do not conduct background checks including
fingerprinting, but the major hurdle in this area is procedural. The
draft does not recognize that FBI administrative standards related to
fingerprinting remain a significant impediment to access by all states.
The report includes a recommendation Congress consider proposals to
allow for nationwide criminal background checks, and the NAIC looks
forward to working with Congress and other interested parties is
carrying out this recommendation.
* The NAIC's efforts in the area of producer licensing do not stop with
certification of reciprocity under Gramm Leach Bliley. The State
Producer Licensing Database (SPLD) is a central repository of producer
licensing information updated on a timely basis by participating state
insurance departments. The SPLD includes data from external databases
such as the Regulatory Information Retrieval System (RIRS) and the
Special Activities Database to provide a more comprehensive producer
profile. SPLD contains the following: general demographic information;
license information (such as states licensed, license numbers,
authorized lines and license status); appointment information (such as
company appointments, effective date, termination date and termination
reason); and regulatory actions (if taken). Currently, the SPLD
includes information from all 50 states, as well as the District of
Columbia and Puerto Rico.
* The report refers to state corporate registration requirements as a
possible barrier to reciprocity and uniformity in the area of business
entity producer licensing. We would note Secretary of State
registration requirements are found in state corporate law, not
insurance law, and such requirements apply to all foreign corporations
seeking to do business in a state, with limited exceptions. State-based
licensing of professionals is the norm and is not considered burdensome
for attorneys, to give one example.
In the area of Product Approval:
* Mississippi enacted the Interstate Compact in March 2009 and will
become an official member effective July 1, 2009 bringing the total
number of compacting states to 34. The Interstate Compact passed the
New Mexico legislature on March 20, 2009 and the governor's signature
is expected shortly.
* The Interstate Insurance Product Regulation Commission (IIPRC) has
now adopted more than 50 uniform standards in the individual life and
annuity product lines, providing greater flexibility to companies in
their product filing options. In addition, the number of companies
registered so far in 2009 has already exceeded the total registrations
in 2008, as more companies realize the tremendous competitive and cost-
saving benefits of being able to prepare one filing, submit it to one
place and receive approval in 60 days or less in up to 33
jurisdictions, 34 on July 1. Currently, the IIPRC turnaround time for
product approval is less than thirty (30) days.
* The report notes some Compact processes allow states to make their
own decisions regarding product approval. There are only very limited
circumstances where the IIPRC uniform standards defer to state law.
Under these circumstances, the content of the product filing stays
consistent so filers are not required to file multiple versions of the
product. Rather, the product is simply required to provide the
applicable provision is subject to state law. For the individual life
insurance Uniform Standards, there are approximately eight (8)
instances where a specific provision of a policy is based on applicable
state law. The nature of these provisions is premised on very basic
public policy choices of states. The Interstate Compact is not intended
to supplant the decisions of state lawmakers on key public policy
decisions affecting consumers' personal freedoms and rights. For this
reason, the IIPRC standards have provided flexibility to accommodate
deference to state public policy in very limited circumstances.
* The GAO refers to consumer group concerns about transparency and
accountability for the Compact. It is important to recognize the IIPRC
uses a public process to develop uniform product standards for product
filings. This process is conducted through open conference calls and
public hearings. All comments and documents associated with a product
standard are available on the IIPRC website along with a chronological
summary of all activity. Standards are reviewed by the IIPRC Management
Committee as well as the full Commission before adoption. All parties
have the opportunity to participate in the product standard development
process. Furthermore, the IIPRC has a comprehensive procedure for
public inspection and copying of its information and official records.
Product filings, upon IIPRC approval, are public records subject to
disclosure. Under the rule, pending, withdrawn and disapproved product
filings are generally the only type of product filings not considered
public records.
* Suitability of sales to consumers is a very important market
regulatory function and for many reasons it is not within the scope of
authority of the IIPRC. The Interstate Compact grants limited
jurisdiction to the IIPRC over the content, approval and certification
of life, annuity, long-term care, and disability income products; and
approval for long-term care and disability income rates and
advertisements. Suitability of the sale of a Compact-approved product
to a certain consumer or groups of consumers falls squarely under the
purview of the state insurance regulator to carry out his or her
authority to oversee the market regulation of the activities of the
insurer. The Interstate Compact is not intended to regulate the market
activities of the insurers. Rather, the Uniform Standards and the
central filing platform is intended to allow companies to prepare one
product filing and submit to one place for approval to offer in the
compacting states. The states retain their authority to protect their
consumers from unsuitable sales of Compact-approved products.
* Finally, the report raises the question of what recourse the Compact
offers consumers in the event an insurance product harms the public.
Generally, consumers do not take action against states for their
approval or disapproval of insurance products. Many states have
statutory immunity for their legislative and regulatory actions. The
Interstate Compact provides a comparable qualified immunity to the
IIPRC members and employees for actions within the scope of Commission
activities including product review and approval. Consumers often bring
actions against companies for claims related to their activities in the
sale or administration of an insurance product. The Interstate Compact
clearly preserves consumer access to state courts and remedies
available under state law related to breach of contract, tort or other
laws not specifically directed to the content of the product.
In the area of Market Conduct Regulation:
* The NAIC provides various market conduct tools and maintains
information sharing agreements which allow for and facilitate
cooperation and collaboration in market conduct analysis. Furthermore,
the Market Actions Working Group (formerly the Market Analysis Working
Group) identifies regulatory issues that may impact multiple
jurisdictions and supports Collaborative Actions.
* The report acknowledges, and we would like to emphasize, the NAIC
continues to work toward standardized data collection practices and the
development of a Market Regulation Accreditation Program. Furthermore,
the Market Conduct Annual Statement (MCAS) is a data collection tool
that is currently utilized in 29 jurisdictions. All jurisdictions have
agreed to participate in MCAS data collection by the end of 2010.
Once again, we thank you for the opportunity to review this report and
submit our comments. We appreciate your attention to these important
aspects of state-based insurance regulation and your recognition of the
steps NAIC members have taken to improve the quality of regulation and
to move toward uniformity where appropriate. As always, we welcome the
GAO's recommendations for further improvement, which will be given
careful consideration as we continue our work toward consumer
protection and a healthy marketplace for the business of insurance.
Sincerely,
Signed by:
Andrew J. Beal:
Chief Operating Officer and Chief Legal Officer
[End of section]
Appendix III: Examples of Market Conduct Annual Statement Data
Elements:
Private Passenger Auto Insurance Data Elements:
* Number Of Claims Open At The Beginning Of The Period.
* Number Of Claims Opened During The Period.
* Number Of Claims Closed During The Period, With Payment.
* Number Of Claims Closed During The Period, Without Payment.
* Median Days To Final Payment.
* Number Of Claims Settled Within 0-30 Days.
* Number Of Claims Settled Within 31-60 Days.
* Number Of Claims Settled Within 61-90 Days.
* Number Of Claims Settled Within 91-180 Days.
* Number Of Claims Settled Within 181-365 Days.
* Number Of Claims Settled Beyond 365 Days.
* Median Days To Date Of Report.
* Number Of Suits Open At Beginning Of The Period.
* Number Of Autos Which Have Policies In-Force At The End Of The Period.
* Number Of Policies In-Force At The End Of The Period.
* Number Of New Business Policies Written During The Period.
* Dollar Amount Of Direct Premium Written During The Period.
* Number Of Non-Renewals During The Period.
* Number Of Cancellations That Occur 60 Days Or More After Effective
Date, Excluding Those For Either Non-Pay Or At The Insured's Request.
* Number Of Cancellations That Occur In The First 59 Days After
Effective Date, Excluding Those For Either Non-Pay Or At The Insured's
Request.
Homeowners Insurance Data Elements:
* Number Of Claims Open At The Beginning Of The Period.
* Number Of Claims Opened During The Period.
* Number Of Claims Closed During The Period, With Payment.
* Number Of Claims Closed During The Period, Without Payment.
* Median Days To Final Payment.
* Number Of Claims Settled Within 0-30 Days.
* Number Of Claims Settled Within 31-60 Days.
* Number Of Claims Settled Within 61-90 Days.
* Number Of Claims Settled Within 91-180 Days.
* Number Of Claims Settled Within 181-365 Days.
* Number Of Claims Settled Beyond 365 Days.
* Median Days To Date Of Report.
* Number Of Suits Open At Beginning Of The Period.
Private Passenger Auto Insurance Data Elements:
* Number Of Suits Closed During The Period.
* Number Of Suits Open At End Of Period.
* Number Of Dwellings Which Have Policies In-Force At The End Of The
Period.
* Number Of Policies In-Force At The End Of The Period.
* Number Of New Business Policies Written During The Period.
* Dollar Amount Of Direct Premium Written During The Period.
* Number Of Non-Renewals During The Period.
* Number Of Cancellations That Occur 60 Days Or More After Effective
Date, Excluding Those For Either Non-Pay Or At The Insured's Request.
* Number Of Cancellations That Occur In The First 59 Days After
Effective Date, Excluding Those For Either Non-Pay Or At The Insured's
Request.
Fixed and Variable Annuities Data Elements:
* Number Of New Replacement Contracts Applied For During The Period.
* Number Of New Replacement Contracts Issued During The Period.
* Internal Replacement Indicator (Yes/No).
* Loan Purchase Indicator (Yes/No).
* 1035 Rollover Indicator (Yes/No).
* Replacement Register Indicator (Yes/No).
* Number Of Contracts Surrendered During The Period.
* Number Of New 1035 Exchanges Coming Into The Company During The
Period.
* Number Of New Contracts Issued During The Period.
* Number Of Contracts In Force At The End Of The Period.
* Dollar Amount Of Annuity Considerations During The Period.
* Number Of Complaints Received Directly From Consumers.
* Number Of Complaints Received Directly From The Corresponding
Department Of Insurance.
* Complaint Register Indicator (Yes/No).
Individual and Group Life Product Data Elements:
* Number Of New Replacement Policies Applied For During The Period.
* Number Of New Replacement Policies Issued During The Period.
* Internal Replacement Indicator (Yes/No).
* Surrender Indicator (Yes/No).
* Loan Purchase Indicator (Yes/No).
* 1035 Rollover Indicator (Yes/No).
* Replacement Register Indicator (Yes/No).
* Number Of In Force Policies Containing Policy Loans With An
Outstanding Balance Over 25 Percent Of The Maximum Loan Value As Of
December 31, 20XX.
* Partial Surrenders Indicator (Yes/No).
Private Passenger Auto Insurance Data Elements:
* Number Of New 1035 Exchanges Coming Into The Company During The
Period.
* Number Of New Policies Issued During The Period.
* Number Of Policies In Force At The End Of The Period.
* Dollar Amount Of Direct Premium During The Period.
* Dollar Amount Of Insurance Issued During The Period (Face Amount).
* Dollar Amount Of Insurance In Force At The End Of The Period (Face
Amount).
* Number Of Complaints Received Directly From Consumers.
* Number Of Complaints Received Directly From The Corresponding
Department Of Insurance.
* Complaint Register Indicator (Yes/No).
* Number Of Death Claims Closed With Payment, During The Period, Within
60 Days From The Date Of Due Proof Of Loss.
* Number Of Death Claims Closed With Payment, During The Period, Beyond
60 Days From The Date Of Due Proof Of Loss.
* Number Of Death Claims Denied, Resisted Or Compromised During The
Period.
* Total Number Of Death Claims Received During The Period.
Source: NAIC.
[End of table]
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Orice M. Williams (202) 512-8678 or williamso@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Patrick Ward (Assistant
Director), Farah Angersola, Emily Chalmers, Barry Kirby, Marc Molino,
Steve Ruszczyk, and Jennifer Schwartz made key contributions to this
report.
[End of section]
Related GAO Products:
Better Information Sharing Among Financial Services Regulators Could
Improve Protections for Consumers. [hyperlink,
http://www.gao.gov/products/GAO-04-882R]. Washington, D.C.: June 29,
2004.
Insurance Regulation: Common Standards and Improved Coordination Needed
to Strengthen Market Regulation. [hyperlink,
http://www.gao.gov/products/GAO-03-433]. Washington, D.C.: September
30, 2003.
Preliminary Views on States' Oversight of Insurers' Market Behavior.
[hyperlink, http://www.gao.gov/products/GAO-03-738T]. Washington, D.C.:
May 6, 2003.
State Insurance Regulation: Efforts to Streamline Key Licensing and
Approval Processes Face Challenges. [hyperlink,
http://www.gao.gov/products/GAO-02-842T]. Washington, D.C.: June 18,
2002.
Regulatory Initiatives of the National Association of Insurance
Commissioners. [hyperlink, http://www.gao.gov/products/GAO-01-885R].
Washington, D.C.: July 6, 2001.
Financial Services Regulators: Better Information Sharing Could Reduce
Fraud. [hyperlink, http://www.gao.gov/products/GAO-01-478T].
Washington, D.C.: March 6, 2001.
Insurance Regulation: Scandal Highlights Need for Strengthened
Regulatory Oversight. [hyperlink,
http://www.gao.gov/products/GGD-00-198]. Washington, D.C.: September
19, 2000.
Insurance Regulation: Scandal Highlights Need for Strengthened
Regulatory Oversight. [hyperlink,
http://www.gao.gov/products/T-GGD-00-209]. Washington, D.C.: September
19, 2000.
[End of section]
Footnotes:
[1] The National Association of Insurance Commissioners (NAIC) is the
organization of insurance regulators from the 50 states, the District
of Columbia, and the five U.S. territories. NAIC assists state
insurance regulators in achieving insurance regulatory goals including
protecting the public interest, promoting competitive markets,
facilitating fair and equitable treatment of insurance consumers,
promoting the reliability, solvency and financial solidity of insurance
institutions, and supporting and improving state regulation of
insurance.
[2] Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999).
[3] National Insurance Act of 2007, H.R. 3200, 110th Congress (2007),
and National Insurance Act of 2007, S. 40, 110th Congress (2007).
[4] National Association of Registered Agents and Brokers Reform Act of
2008, H.R. 5611, 110th Congress (2008).
[5] The securities lending program allowed insurance companies,
primarily the life insurance companies, to lend securities in return
for cash collateral that was invested in residential mortgage-backed
securities (RMBS). When the value of these securities declined in 2007,
AIG incurred significant losses when it had to return the cash
collateral when its borrowed securities were returned. Collateralized
debt obligations are securities backed by a pool of bonds, loans, or
other assets.
[6] According to NAIC, an insurance producer, also called an agent or
insurance broker, is an individual licensed by a state's or
jurisdiction's insurance division or department to sell, solicit or
negotiate insurance in that state or jurisdiction. To become licensed,
producers must take pre-licensing education in most states,
successfully pass an insurance licensing exam, and pay all licensing
fees. A licensee must then complete ongoing continuing education
courses on ethics, law, and product knowledge on a periodic basis.
[7] Lines of insurance refer to the different types of insurance
insurers generally offer for sale to consumers. The NAIC categorizes
insurance according to the following groups: property, casualty,
variable life and variable annuity, life, personal lines, and accident
or health and sickness.
[8] State insurance regulators may conduct examinations of insurance
companies to be sure that the companies doing business within their
states comply with state laws and regulations with respect to rating,
underwriting, and claim practices. These market conduct examinations
may be scheduled based on consumer complaint activity, special
requests, or at regular intervals.
[9] The five territories are Puerto Rico, Guam, U.S. Virgin Islands,
American Samoa, and Northern Mariana Islands.
[10] The federal government retains the authority to regulate insurance
under the constitution's commerce clause and has given primary
responsibility for insurance regulation to the states in accordance
with the McCarran-Ferguson Act of 1945. 15 U.S.C. §§ 1011-1015.
[11] GAO, Financial Regulation: A Framework for Crafting and Assessing
Proposals to Modernize the Outdated U.S. Financial Regulatory System,
[hyperlink, http://www.gao.gov/products/GAO-09-216] (Washington, D.C.:
Jan. 8, 2009).
[12] NAIC's lines of insurance consist of property, casualty, life,
personal lines, accident and health or sickness, and variable life/
variable annuity. NAIC's limited lines of insurance consist of credit,
car rental, crop, travel, and surety.
[13] GAO, Better Information Sharing among Financial Regulators Could
Improve Protections for Consumers, [hyperlink,
http://www.gao.gov/products/GAO-04-882R] (Washington, D.C.: June 29,
2004) and State Insurance Regulation: Efforts to Streamline Key
Licensing and Approval Processes Face Challenges, [hyperlink,
http://www.gao.gov/products/GAO-02-842T] (Washington, D.C.: June 18,
2002) specifically addressed producer licensing concerns.
[14] The FBI is authorized to exchange criminal history information
with officials of state and local governmental agencies for licensing
and employment purposes if authorized by a state statute that has been
approved by the Attorney General of the United States. Pub. L. No. 92-
544, 86 Stat. 1115 (1972), codified at 28 U.S.C. § 534 note.
[15] In addition to state insurance laws, 18 U.S.C. § 1033 provides
that, among other things, a person who has been convicted of any
criminal felony involving dishonesty or a breach of trust or any
offense described in the section may engage in the business of
insurance only through the written consent of an insurance regulatory
official authorized to regulate the insurer.
[16] According to NAIC, the New Mexico legislature approved joining the
Interstate Compact on March 20, 2009, and the governor's signature is
expected shortly.
[17] Joint and several liability is a form of liability used in civil
cases where two or more parties are found liable for damages. The
winning plaintiff in such a case may collect the entire judgment from
any one of the parties regardless of fault or from any and all of the
parties in various amounts until the judgment is paid in full. This
generally means that if any of the defendants do not have sufficient
assets to pay an equal share of the award, the other defendant must
make up the difference. Joint and several liability is most relevant in
tort claims.
[18] GAO, Insurance Regulation: Common Standards and Improved
Coordination Needed to Strengthen Market Regulation, [hyperlink,
http://www.gao.gov/products/GAO-03-433] (Washington, D.C.: Sept. 30,
2003).
[19] Appendix III contains a more comprehensive list of the data
elements collected in the MCAS for insurance products, including
Individual and Group Life, Fixed and Variable Annuities, Private
Passenger Auto, and Homeowners products.
[20] GAO, Insurance Regulation: Common Standards and Improved
Coordination Needed to Strengthen Market Regulation, [hyperlink,
http://www.gao.gov/products/GAO-03-433] (Washington, D.C.: Sept. 30,
2003).
[End of section]
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